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Fiscal sustainability and demographics – Should we save or work more?

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  • 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. However, 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 statutory retirement ages to longevity. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed.

Suggested Citation

  • Andersen, Torben M., 2012. "Fiscal sustainability and demographics – Should we save or work more?," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 264-280.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:264-280
    DOI: 10.1016/j.jmacro.2012.01.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Riccardo Magnani, 2016. "Is an Increase in the Minimum Retirement Age Always Desirable? The Case of Notional Defined Contribution Systems," Metroeconomica, Wiley Blackwell, vol. 67(3), pages 578-602, July.
    2. Simonovits, András, 2013. "Egyszerű paternalista transzfermodellek családja
      [A family of simple paternalistic transfer models]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 402-430.
    3. Andras Simonovits, 2012. "Optimal linear redistributive tax and pension systems with flexible labor supply," IEHAS Discussion Papers 1233, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    4. Torben Andersen, 2014. "Intergenerational redistribution and risk sharing with changing longevity," Journal of Economics, Springer, vol. 111(1), pages 1-27, February.
    5. Andras Simonovits, 2013. "A family of simple paternalistic transfer models," IEHAS Discussion Papers 1324, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    6. Riccardo Magnani, 2016. "Is an Increase in the Minimum Retirement Age Always Desirable? The Case of Notional Defined Contribution Systems," Post-Print hal-01362459, HAL.

    More about this item

    Keywords

    Tax smoothing; Fiscal sustainability; Longevity; Fertility;

    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, Macroeconomic Effects, and Forecasts

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