Even if the state can constrain pensions, won’t it nonetheless buckle under the strain of greater health-care spending as people live longer? This fear is widespread because medical bills for the old are much higher than those for the young. But that is largely because a big chunk of lifetime medical spending is incurred a year or so before death, whatever one’s age, and most deaths now are among the old. Rising longevity reflects improved health and postpones the peak years of spending rather than lengthening them.
Public spending on health has already lurched out of control owing to expensive new technologies and malfunctioning medical markets. These are the crucial cost pressures that must be capped. Three reforms will be crucial. One is to get individuals to contribute more themselves through private insurance (while protecting the poor and those with chronic diseases). The second is to enhance competition and so reduce the power of the medical providers who currently call the shots. The third is to deploy a technology that lowers rather than raises costs. Information technology offers tremendous scope to boost efficiency in health care not least since doctors and hospitals have been so woefully backward in adopting it.
As states curb their commitments to the old they will step up their investment in the young. Public finances will stay sound only if economic growth remains healthy and that will require better skills. As young people become scarcer, it will be even more vital to ensure that they start work as highly qualified as possible, which will require more rather than less spending on education both in schools and universities and during their working lifetimes.
The state of 2050 will also do much more to encourage innovation. Whereas developing economies can grow fast simply by investing heavily and catching up with best practice, advanced countries must push out the technological frontier. The state can help by financing pure science and supporting R&D and high-tech start-ups.
The politics of reshaping the state will undoubtedly be tough. Retiring later and contributing more to private health insurance will be unpopular. Won’t the old, who will make up a larger share of the electorate, block reforms? This despairing claim is often made, yet no one, young or old, has an interest in a bust state. That is why the fiscal nightmare that lies ahead will remain just that. The reality in 2050 will be a fitter, smarter and solvent state.
Paul Wallace is the European economics editor of The Economist.