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Ageing and the tax implied in public pension schemes: simulations for selected OECD countries

  • Robert Fenge
  • Martin Werding

A key figure suited to measuring intergenerational imbalances in unfunded public pension schemes is given by the 'implicit tax rate' imposed on each generation's lifetime income. The implicit tax arises from the fact that, quite generally, pension benefits fall short of actuarial returns to contributions paid to these systems while actively working. Under current pension policies, implicit tax rates will increase sharply for younger generations in most industrialised countries. In this paper, this is illustrated for the cases of France, Germany, Italy, Japan, Sweden, the UK and the USA. Nevertheless, there are remarkable differences across countries regarding both the level of implicit taxes and their development over successive age cohorts, which can be attributed to differences in ageing processes and in the institutional features of national pension systems. In addition, we can demonstrate how effective different approaches to pension reform are in smoothing the intergenerational profile of implicit tax rates.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 25 (2004)
Issue (Month): 2 (June)
Pages: 159-200

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Handle: RePEc:ifs:fistud:v:25:y:2004:i:2:p:159-200
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  1. Martin Werding & Harald Blau, 2002. "Auswirkungen des demographischen Wandels auf die staatlichen Alterssicherungssysteme : Modellrechnungen bis 2050," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 8.
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  15. Gary Burtless, 2001. "The Rationale for Fundamental Pension Reform in Germany and the United States: An Assessment," CESifo Working Paper Series 510, CESifo Group Munich.
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