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Population aging, social security and fiscal limits

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  • Heer, Burkhard
  • Polito, Vito
  • Wickens, Michael R.

Abstract

We use an overlapping generations (OLG) life-cycle model with distortionary taxation on labor and capital to derive a threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the level of the threshold; the distance of the economy from the threshold; and the probability of reaching the threshold at some point in the future. The model is calibrated on the United States and fourteen European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.

Suggested Citation

  • Heer, Burkhard & Polito, Vito & Wickens, Michael R., 2020. "Population aging, social security and fiscal limits," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
  • Handle: RePEc:eee:dyncon:v:116:y:2020:i:c:s0165188920300816
    DOI: 10.1016/j.jedc.2020.103913
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    Cited by:

    1. Burkhard Heer & Mark Trede, 2020. "Age-Specific Entrepreneurship and PAYG Public Pensions in Germany," CESifo Working Paper Series 8439, CESifo.
    2. Fernando Arias-Rodríguez & Julián A. Parra-Polanía, 2021. "Pensiones y reforma pensional: efectos macroeconómicos del envejecimiento en Colombia," Borradores de Economia 1173, Banco de la Republica de Colombia.
    3. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    4. Heer, Burkhard & Rohrbacher, Stefan, 2021. "Endogenous longevity and optimal tax progressivity," Journal of Health Economics, Elsevier, vol. 79(C).
    5. Michael Wickens, 2022. "How might the United Kingdom's debt–GDP ratio be reduced? Evidence from the last 120 years," Economic Affairs, Wiley Blackwell, vol. 42(2), pages 369-384, June.
    6. Edouard Ribes, 2022. "What are the financial implications of an ageing population for European citizens?," Working Papers hal-03118783, HAL.

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    More about this item

    Keywords

    Dependency ratio; Fiscal space; Laffer effects; Pensions; Fiscal policy sustainability;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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