A study conducted by Braulio Borges, an FGV Ibre researcher and senior economist at LCA Consultores, indicates that while the short-term demographic outlook, based on recent projections released by the Brazilian Institute of Geography and Statistics (IBGE) in August, is less severe, expenditures on healthcare, medication, and pensions are expected to rise significantly from 2040 onwards.

Despite the government’s recent discussions on cutting expenditures, the proposed budget for 2025 allocates R$113.6 billion to education, a 4.8% increase over this year, even as the school-age population decreases.

“Population growth has already been slowing from 2.5% annually in the 1970s to 2.1% in the 1980s, 1.6% in the 1990s, 1.2% from 2001 onwards, and in the last three or four years it’s at 0.4%, well below the 0.7% projected in 2018,” Mr. Borges states. “Based on the population projections from the IBGE’s August revision, by the end of this decade, growth will slow to 0.3%, which is expected to continue. This less favorable demographic trend has implications that need to be considered in discussions.”

Mr. Borges argues that in the 1990s, a 4% annual growth in total GDP correlated with a per capita GDP growth of about 2.3% because the population grew by 1.6% annually. In the 2000s, a 3.5% GDP growth meant the per capita GDP grew by 2.3% as well, since the population at that time was growing by 1.1%.

If the IMF’s projections for Brazil’s potential GDP are confirmed, he says, the GDP is expected to grow by 2.5% in the coming years, with the population increasing by 0.3%, resulting in a per capita growth of 2.2%, nearly matching the 2.3% of previous decades.

“This has various implications, not only in terms of potential GDP but also for the growth targets set by the government and the formulation of economic policies,” Mr. Borges explains.

He predicts that a growth rate similar to previous decades will further strain government spending in the medium term. In addition to slower population growth, Brazil’s demographic composition will also shift, posing challenges related to an increasing elderly population.

Mr. Borges notes that new IBGE data show the working-age population (those over 14 years old) is 1.7% smaller than indicated by the Continuous National Household Sample Survey (Pnad Contínua), which translates to about 3 million fewer people of working age.

“Changes in the employed population can impact GDP calculations not only through growth rates but because data from sectors like construction, services, and public administration are used as inputs for GDP growth calculations,” he says.

The revised data confirm that Brazil’s demographic dividend is a thing of the past, but Mr. Borges asserts that the demographic burden—when the population outside the working age grows faster than the working-age population, hindering GDP expansion—will progress more slowly than previously anticipated.

“The percentage of the population aged 18 to 65 stopped growing in 2018, 2019. But interestingly, the new projections show that the demographic burden doesn’t become as pronounced until the 2040s,” he says. “It’s a gradual decline until then, but after that, it starts accelerating.”

Given the future demographic composition, Mr. Borges forecasts a significant increase in healthcare and pension spending, with less need for increased education spending.

He notes that average healthcare plan premiums rise from age 40, as do average monthly outpatient and hospital expenses. Besides the fiscal impact, Mr. Borges suggests there may be shifts in the sectoral composition of GDP, with more healthcare services being consumed. Recent projections anticipate the percentage of the population aged 40 to 65 increasing from 32.3% currently to 36.1% by 2040.

This outlook comes as healthcare spending is already rising rapidly, warns Fabio Giambiagi, an associated researcher at FGV Ibre.

“In 2022, the federal government’s mandatory healthcare expenditure was 1.04% of GDP. In 2023, due to changes in the wording of the so-called Transition Constitutional Amendment Proposal (PEC), it increased to 1.19%. My estimate for this year is that it will rise to 1.35%. In two years, we’ve increased mandatory healthcare spending by 0.3 percentage points of GDP. That’s significant.”

Like healthcare, pensions will be directly impacted by changes that will begin to accelerate from 2040. The percentage of the population aged 18 to 65—who are currently employed and finance retirees—is expected to decrease from the current 65.7% to 64.9% in 2040 and 61.5% by 2050, according to the IBGE.

“We have a pay-as-you-go system, where those who contribute are those who are currently working. Today’s demographics have made the pension deficit slightly less unfavorable for the next 15 years compared to what we imagined in 2018,” he says, noting that projections had anticipated the percentage of the population aged 18 to 65 would reach 63.2% by 2040. “But we are already on a trajectory that’s increasingly unfavorable for pension financing.”

Relief

Unlike healthcare and pension expenditures, public and private education spending is expected to decrease in the future, following the decline in the population under 18 years old, which will drop from the current 25.3% of the total population to 19.3% by 2040.

“It makes no sense to conceive an educational policy without considering the number of students it will need to serve,” says Mr. Giambiagi. “In the age group of 0 to 14 years in 2060, the 2018 revision projected 33.6 million children, while the 2024 revision projects 26.8 million. That’s 7 million fewer children. Even if real education spending remains constant, without growth, per capita spending would increase.”

He also notes that following the PEC approved in 2020, the percentage of net revenue allocated to the Fund for Maintenance and Development of Elementary Education (Fundeb) has been increasing since 2021.

“If we want a number already at 2025 prices, considering the budget, we’re talking about Fundeb spending going from R$20.9 billion in 2020 to R$55 billion next year,” he states. “When we compare Fundeb spending over the period, the increase will have been astronomical, in real terms more than 150%.”

In recent years, federal spending on Fundeb has risen from R$22.8 billion in 2021 to R$32.5 billion in 2022 and R$37.3 billion in 2023. For 2024, the projected expenditure is R$43 billion.

In the current discussion about spending cuts, says Luiz Schymura, a researcher at FGV Ibre, Fundeb resources are under scrutiny.

Among the measures being studied by the economic team is increasing the portion of the federal government’s resources transferred to Fundeb in the constitutional floor from the current 30% to 60%. In this way, the government hopes to create more room for discretionary spending.

“To me, it’s a mistake to go in the opposite direction, meaning the youth population is declining and education spending is increasing,” Mr. Schymura asserts.

Besides the fiscal issue, Mr. Borges points out, the end of the demographic dividend impacts economic growth through savings rates, investment, and innovation.

“The more the population aged 18 to 65 grows, the higher the GDP growth rate. Demographics, therefore, can both boost and hinder economic growth through several transmission channels, not just through a greater or lesser labor supply,” the economist explains.

He notes that while younger people do not save, as they do not work and consume their parents’ income, those entering the job market start saving at low rates, which increase over their working lives, peaking near retirement age. In Brazil, he adds, older individuals continue to save.

“Demographic composition also affects the aggregate savings rate of the economy due to very different savings rates across age groups,” he says, highlighting that the aggregate savings rate and the investment rate are two important determinants of a country’s equilibrium interest rate.

“The impact of demographic changes on this is little discussed in Brazil, which increases the need for more analysis to understand the implications for equilibrium interest rates.”

Samuel Pessôa, a researcher at FGV Ibre and Julius Baer Family Office (JBFO), cites measures taken in the 1990s as one of the reasons why changes in age structure are not given enough consideration in discussions.

“At a time when Brazil’s age structure was shifting toward a situation very favorable to savings, measures in the construction of our welfare state from the 1990s had the effect of reducing the savings rate,” he asserts.

Mr. Pessôa recalls that in the 1970s, Brazil saved 21% of its GDP, a percentage that has fallen to 16% today. “This happened at a time when, due to demographic evolution, the savings rate should have increased, as it was when we began to fully experience the demographic dividend,” he explains.

Besides the savings rate and equilibrium interest rates, demographic transformations also impact the inflation rate.

He anticipates, for example, that the consumption basket of the elderly population, with a higher proportion of healthcare services and medications, will weigh more on overall inflation, increasing it by about 0.2 percentage points annually.