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Fiscal Sustainability and Demographics - Should We Save or Work More?

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  • Andersen, Torben M
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    Abstract

    Approaching demographic shifts are raising concerns about fiscal sustainability in most OECD countries. A widespread view based on the tax-smoothing idea is that a prior consolidation of public finances is required to cope with the predicted trend deterioration in the primary budget balance. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed. It is argued that the smoothing argument cannot unconditionally be applied to the demographic problem. It is important to distinguish between increases in the dependency ratio driven by changes in fertility and longevity. For the former the smoothing argument may be appropriate, but not for the latter. In the case of longevity, a trade-off between consolidation and increasing retirement ages becomes relevant, and there are strong arguments why the latter should be pursued by e.g. linking retirement ages to longevity.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7044.

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    Date of creation: Nov 2008
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    Handle: RePEc:cpr:ceprdp:7044

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    Keywords: fertility; fiscal sustainability; longevity; Tax smoothing;

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    1. Mulligan Casey B & Sala-i-Martin Xavier, 2004. "Political and Economic Forces Sustaining Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-56, May.
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    3. Boris Cournède & Frédéric Gonand, 2006. "Restoring Fiscal Sustainability in the Euro Area: Raise Taxes or Curb Spending?," OECD Economics Department Working Papers 520, OECD Publishing.
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    6. Flodén, Martin, 2002. "Public Saving and Policy Coordination in Ageing Economies," CEPR Discussion Papers 3567, C.E.P.R. Discussion Papers.
    7. Padilla, Emilio, 2002. "Intergenerational equity and sustainability," Ecological Economics, Elsevier, vol. 41(1), pages 69-83, April.
    8. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    9. Daniel Leigh & David Hauner & Michael Skaarup, 2007. "Ensuring Fiscal Sustainability in G-7 Countries," IMF Working Papers 07/187, International Monetary Fund.
    10. Andersen, Torben M., 2008. "Increasing longevity and social security reforms--A legislative procedure approach," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 633-646, April.
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