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Ageing and the Tax Implied in Public Pension Schemes: Simulations for Selected OECD Countries

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  • Robert Fenge
  • Martin Werding

Abstract

A key figure which can be applied to measuring inter-generational imbalances involved in existing public pension schemes is given by the “implicit tax” that is levied on each generation’s life-time income through participation in these systems. The implicit tax arises from the fact that, quite generally, pension benefits received fall short of actuarial returns to contributions (i.e., “explicit” social security taxes) paid while actively working. If, in spite of large-scale demographic ageing, public pension schemes are continued to be run based on current rules, implicit tax rates will sharply increase for generations who are currently young when compared to those who are already approaching retirement. In the paper, this will be illustrated for the cases of France, Germany, Italy, Japan, Sweden, the UK, and the US. The results are based on simulations covering representative individuals in all age cohorts born from 1940 to 2000. At the same time, there are striking differences across countries regarding both the level of implicit taxes and their time paths over successive age cohorts, which can be attributed to different ageing processes as well as to different institutional features of national pension systems. In addition, we are studying the impact of pension reforms that were recently enacted or are currently under way, thus demonstrating how effective the measures taken are in terms of smoothing the inter-generational profile of implicit tax rates.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 841.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_841

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Keywords: demographic ageing; public pensions; pension reform; inter-generational redistribution; international comparisons;

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References

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  1. Deborah Roseveare & Willi Leibfritz & Douglas Fore & Eckhard Wurzel, 1996. "Ageing Populations, Pension Systems and Government Budgets: Simulations for 20 OECD Countries," OECD Economics Department Working Papers 168, OECD Publishing.
  2. Peter Scherer, 2002. "Age of Withdrawal from the Labour Force in OECD Countries," OECD Labour Market and Social Policy Occasional Papers 49, OECD Publishing.
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  7. David Blake, 2002. "The United Kingdom: Examining the Switch from Low Public Pensions to High-Cost Private Pensions," NBER Chapters, in: Social Security Pension Reform in Europe, pages 317-348 National Bureau of Economic Research, Inc.
  8. A. Javier Hamann, 1997. "The Reform of the Pension System in Italy," IMF Working Papers 97/18, International Monetary Fund.
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  11. Didier Blanchet & Louis-Paul Pele, 1997. "Social Security and Retirement in France," NBER Working Papers 6214, National Bureau of Economic Research, Inc.
  12. Hans-Werner Sinn & Martin Werding, 2000. "Rentenniveausenkung und Teilkapitaldeckung - ifo Empfehlungen zur Konsolidierung des Umlageverfahrens," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 53(18), pages 12-25, 06.
  13. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  14. Laurence J. Kotlikoff & Willi Leibfritz, 1998. "An International Comparison of Generational Accounts," NBER Working Papers 6447, National Bureau of Economic Research, Inc.
  15. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
  16. Robert Holzmann & Robert Palacios & Asta Zviniene, 2001. "On the Economics and Scope of Implicit Pension Debt: An International Perspective," Empirica, Springer, vol. 28(1), pages 97-129, March.
  17. Daniele Franco, 2002. "Italy: A Never-Ending Pension Reform," NBER Chapters, in: Social Security Pension Reform in Europe, pages 211-262 National Bureau of Economic Research, Inc.
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