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Population ageing and fiscal sustainability in Finland: a stochastic analysis

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Author Info

  • Lassila , Jukka

    ()
    (Research Institute of the Finnish Economy)

  • Valkonen, Tarmo

    ()
    (Research Institute of the Finnish Economy)

Abstract

This study analyses the fiscal sustainability of the Finnish public sector using stochastic projections to describe uncertain future demographic trends and asset yields. While current tax rates are unlikely to yield sufficient tax revenue to finance public expenditure with an ageing population, if developments are as expected, the problem will not be very large. However, there is a small, but not negligible, probability that taxes will need to be raised dramatically, perhaps by over 5 percentage points. Such outcomes, if realised, could destabilise the entire welfare state. The study also analyses three policy options aimed at improving sustainability. Longevity adjustment of pension benefits and introduction of an NDC pension system would reduce the expected problem and narrow the sustainability gap distribution. Under the third option, pension funds would invest more in equities and expect to get higher returns. This policy also limits the sustainability problem, but only under precondition that policymakers in the future can live with substantially larger variation in the value of the funds without adjusting tax rules or benefits.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 28/2008.

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Length: 71 pages
Date of creation: 03 Dec 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_028

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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: public finance; fiscal sustainability; uncertainty; stochastic simulations;

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References

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  1. Kilponen , Juha & Kinnunen , Helvi & Ripatti , Antti, 2006. "Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model," Research Discussion Papers 28/2006, Bank of Finland.
  2. Mendoza, Enrique G. & Oviedo, P. Marcelo, 2006. "Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Latin America: The Cases of Brazil, Colombia, Costa Rica, and Mexico," Staff General Research Papers 12700, Iowa State University, Department of Economics.
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  11. Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  12. Nick Davis, 2001. "Does Crown Financial Portfolio Composition Matter?," Treasury Working Paper Series 01/34, New Zealand Treasury.
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  16. Jukka Lassila & Tarmo Valkonen, 2004. "Pre-funding Expenditure on Health and Long-term Care under Demographic Uncertainty," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 29(4), pages 620-639, October.
  17. Pål Ulla, 2006. "Assessing Fiscal Risks through Long-term Budget Projections," OECD Journal on Budgeting, OECD Publishing, vol. 6(1), pages 127-187.
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  22. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 139-153, July.
  23. Nick Davis & Richard Fabling, 2002. "Population Ageing and the Efficiency of Fiscal Policy in New Zealand," Treasury Working Paper Series 02/11, New Zealand Treasury.
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  25. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
  26. Jukka Lassila & Tarmo Valkonen, 2007. "The Finnish Pension Reform of 2005," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 32(1), pages 75-94, January.
  27. Settergren, Ole & Mikula, Boguslaw D., 2005. "The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 115-138, July.
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  29. repec:nsr:niesrd:250 is not listed on IDEAS
  30. Lassila, Jukka & Valkonen, Tarmo, 2001. "Ageing, Demographic Risks, and Pension Reform," Discussion Papers 765, The Research Institute of the Finnish Economy.
  31. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
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Citations

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Cited by:
  1. Lassila, Jukka & Valkonen, Tarmo, 2014. "Longevity, Working Lives and Public Finances," ETLA Working Papers 24, The Research Institute of the Finnish Economy.
  2. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.

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