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Population ageing and public pension reforms in a small open economy

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Author Info
Christiane Nickel () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Philipp Rother () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Angeliki Theophilopoulou () (University of London, Birkbeck College, School of Economics, Mathematics and Statistics, Malet Street, WC1E 7HX London, UK.)
Abstract

This paper aims to address the issue of public pension reforms under demographic ageing that is likely to occur in Europe over the next 50 years. Three possible scenarios are analysed in a Blanchard OLG framework. These include: i) a decrease both in public pensions and the lump sum labour income tax, ii) a decrease both in public pensions and the distortionary corporate tax, iii) an increase in the retirement age. The analysis focuses on the effects of these fiscal policies on key economic variables such as consumption, private and public debt, output and wages. Quantitative experiments assess the impact of different fiscal policies in terms of public debt sustainability but most importantly suggest policies that smooth the transition of the economy to the new equilibrium. The main results suggest that the adverse effects of pension reforms on consumption are moderated when they are accompanied by appropriate taxation policies. In particular, when the tax response is rapid most of the adverse movement in consumption is avoided while public and national debt reach lower equilibrium levels. JEL Classification: E6, H3, J1, H55.

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Paper provided by European Central Bank in its series Working Paper Series with number 863.

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Length: 40 pages
Date of creation: Feb 2008
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Handle: RePEc:ecb:ecbwps:20080863

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Related research
Keywords: Ageing; Pension Reforms; Taxation; Overlapping Generations.;

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