Can we afford to live longer in better health?

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This research report analyses the effects of ageing populations upon public finances. More specifically, it focuses on the implications of population ageing for acute health care, long-term care and public pension expenditures for 15 EU countries. It pays particular attention to three novel insights: i) a large proportion of health-care spending relates to time to mortality rather than to age; ii) life expectancy may increase much faster than current demographic projections suggest; and, iii) average health status may continue to improve in the future. It adopts a generational accounting model that incorporates health-care costs during the last years of life, decomposed into an acute health-care component and a long-term care component. The projections show that gains in life expectancy increase age-related expenditure, while improved health has the opposite effect. Combined, these trends reduce health-care costs and increase pension expenditures. Their joint effect upon public finances is rather modest, however. Hence, the assessment of public finances in most EU-15 countries does not change: even if a more rapid increase in life expectancy combines with an improvement in health, current fiscal and social security institutions will be unsustainable.