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Government funds and demographic transition – alleviating ageing costs in a small open economy

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  • Kinnunen, Helvi

    ()
    (Bank of Finland Research)

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    Abstract

    This paper investigates public pension funding using a dynamic general equilibrium macroeconomic model (DSGE) that facilitates investigation of distortionary effects of fiscal and pension policy responses to ageing. The model is calibrated to the Finnish economy, which will encounter substantial ageing pressures in the near future. During the transition to an older population structure ageing costs can be substantially lowered by allowing public funds to smooth out the tax responses. Cutting down on pension prefunding at a time when the pace of ageing is at its peak reduces the necessary tax hikes and stimulates labour supply growth at the moment when the labour market is tightest. With smaller funding needs, ageing leads to a slower growth in labour costs, a better employment conditions and faster production growth.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0821netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 21/2008.

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    Length: 39 pages
    Date of creation: 23 Sep 2008
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2008_021

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: ageing; general equilibrium; public finance; government funds;

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    1. Axel Börsch-Supan & Alexander Ludwig & Joachim Winter, 2002. "Aging, pension reform and capital flows: a multi-country simulation model," Computing in Economics and Finance 2002 108, Society for Computational Economics.
    2. Fisher, Walter H. & Keuschnigg, Christian, 2007. "Pension Reform and Labor Market Incentives," Economics Series 208, Institute for Advanced Studies.
    3. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
    4. Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2010. "Pension reform, retirement, and life-cycle unemployment," International Tax and Public Finance, Springer, vol. 17(5), pages 556-585, October.
    5. Attanasio Orazio P. & Gianluca Violante, 1999. "Global Demographic Trends and Social Security Reform," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
    6. Gertler, Mark, 1999. "Government debt and social security in a life-cycle economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 61-110, June.
    7. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
    8. Martin Feldstein, 2005. "Rethinking Social Insurance," American Economic Review, American Economic Association, vol. 95(1), pages 1-24, March.
    9. Gabrielle Demange, 2005. "Free choice of unfunded systems: a first assessment," PSE Working Papers halshs-00590861, HAL.
    10. Whitehouse, Edward & Queisser, Monika, 2007. "Pensions at a glance: public policies across OECD countries," MPRA Paper 16349, University Library of Munich, Germany.
    11. Cooley, Thomas F., 1999. "Government debt and social security in a life-cycle economy : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 111-117, June.
    12. Lucas, Deborah, 2007. "Comment on "Global demographic trends and social security reform" by Orazio Attanasio, Sagiri Kitao, and Giovanni Violante," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 199-204, January.
    13. Hewitt, Paul S., 2004. "The Economic and Financial Market Consequences of Global Ageing by Kieran McMorrow and Werner Roeger, Springer Verlag, 2004, ISBN 0892063939, 345 pages, Price $99.00," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 255-257, July.
    14. Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund.
    15. Nickel, Christiane & Rother, Philipp & Theophilopoulou, Angeliki, 2008. "Population ageing and public pension reforms in a small open economy," Working Paper Series 0863, European Central Bank.
    16. Richard Hemming, 1998. "Should Public Pensions Be Funded?," IMF Working Papers 98/35, International Monetary Fund.
    17. Lans Bovenberg & Thijs Knaap, 2005. "Ageing, Funded Pensions and the Dutch Economy," CESifo Working Paper Series 1403, CESifo Group Munich.
    18. Valkonen, Tarmo, 2002. "Demographic Uncertainty and Taxes," Discussion Papers 816, The Research Institute of the Finnish Economy.
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