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

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Author Info
Andersen, Torben M
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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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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Related research
Keywords: fertility; fiscal sustainability; longevity; Tax smoothing;

Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts

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  1. Casey B. Mulligan & Xavier Sala-i-Martin, 2004. "Political and Economic Forces Sustaining Social Security," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  4. Padilla, Emilio, 2002. "Intergenerational equity and sustainability," Ecological Economics, Elsevier, vol. 41(1), pages 69-83, April. [Downloadable!] (restricted)
  5. Martin FlodÈn, 2003. "Public Saving and Policy Coordination in Aging Economies," Scandinavian Journal of Economics, Blackwell Publishing, vol. 105(3), pages 379-400, 09. [Downloadable!] (restricted)
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  6. Galasso, Vincenzo & Profeta, Paola, 2002. "The political economy of social security: a survey," European Journal of Political Economy, Elsevier, vol. 18(1), pages 1-29, March. [Downloadable!] (restricted)
  7. Boris Cournède & Frédéric Gonand, 2006. "Restoring Fiscal Sustainability in the Euro Area: Raise Taxes or Curb Spending?," OECD Economics Department Working Papers 520, OECD, Economics Department. [Downloadable!]
  8. Daniel Leigh & David Hauner & Michael Skaarup, 2007. "Ensuring Fiscal Sustainability in G-7 Countries," IMF Working Papers 07/187, International Monetary Fund. [Downloadable!]
  9. David De La Croix & Géraldine Mahieu & Alexandra Rillaers, 2004. "How Should the Allocation of Resources Adjust to the Baby Bust?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(4), pages 607-636, October. [Downloadable!] (restricted)
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