By Sara Troiano*

The Argentinian population is going through a 30 years period called “demographic window of opportunity”. During such period the proportion of the working age population grows, resulting in a larger potential capacity of saving. The challenge for the society is to create the conditions that the labour market and the financial and institutional systems need to actually generate a greater level of savings during the next 30 years and to using those savings to achieve larger investments in physical and human capital.

The demographic transition that Argentina is going through creates socioeconomic opportunities and challenges. Argentina still is a young country, in which the working age population represents the largest proportion of the entire population.  The dynamic of the fertility rate and the mortality rate results in a progressively aging population, which has implications on several dimensions of the economy, the social security system, public policies and the society.

Thirty years from now, the aging population will have a significant impact on Argentina’s public expenditure and on its capacity to support economic growth. Therefore, there is a need to set stable mechanisms that connect savings with investments in order to reach the aging population’s stage with a better supply of capital per worker, enabling an increase of productivity and of the country’s product.

Hence, the challenge for the Argentinian society is to become wealthy before becoming too old, and to accumulate human and physical capital to maintain sustainable growth. However, there are major challenges to achieve this goal. The performance of the educational system, the social security system, the labour market, public finances and decisions of expenditure, as well as the performance of the financial system to encourage savings and to link savings and investments, are key issues that must be analysed and discussed using a long-term perspective, taking into account the future generations.

In a recently published book (As time goes by in Argentina) we have discussed the opportunities and challenges that the demographic transition poses for the Argentinian economy, as well as for its most relevant sectors, such as the health, educational and social security systems, and the potential tax trade-offs it may have to face. The study suggests that, even though Argentina is moving forward in its’ demographic transition, it has just started enjoying the window of opportunity. In other words, it is a great moment to achieve acquisition of capital and future economic growth.  Once the window of opportunity is over, the aging population will have a significant impact on the level of expenditure, particularly on the expenses generated by the social security system.

In Argentina, the percentage of population older than 65 years old will go from the current 10.4% to 19.3% in 2050 and to 24.7% in 2100. Within this context, the percentage of expenditure of the pension system over the GDP will go from the current 9% to 11% in 2030 and 15.5% in 2050. This situation creates a major challenge for future generations. Something similar, though at a lower level, will happen with the health system expenditure, which shall go from 6.3% of the GDP to 7% in 2050. As regards the educational system, Argentina will face a good opportunity to increase the investment per student and keep on using the same level of resources it currently uses (in terms of GDP), as there will be a smaller proportion of children and young people in the future.

Each of these issues represent a clear challenge from a tax policy perspective. If no long term reforms are implemented, the demographic transition will put pressure on the re-assignation of tax resources among social sectors. Finally, the aging population introduces questions regarding the sustainability of the economic growth rate with a smaller working age population. Making the most of the current window of opportunity, increasing savings to finance the acquisition of capital and increasing the productivity of the future workforce is the main challenge for the Argentinian economy.

*Sara Troiano is a Junior Professional of Human Development for Argentina, Uruguay and Paraguay at the World Bank. She works as an economist in the areas of social protection, education and innovation.

Source: Bastión Digital