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Fiscal prefunding in response to demographic uncertainty

Author

Listed:
  • Alex Armstrong
  • Nick Draper
  • André Nibbelink

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Ed Westerhout

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

Uncertainty in demographic developments lowers expected future welfare levels. Increasing current tax rates and decreasing expected future tax rates may compensate part of the welfare loss that is due to demographic uncertainty. In doing so, the government effectively pursues a precautionary fiscal policy analogous to the precautionary life-cycle saving behaviour that households may exhibit in the presence of income uncertainty.

Suggested Citation

  • Alex Armstrong & Nick Draper & André Nibbelink & Ed Westerhout, 2007. "Fiscal prefunding in response to demographic uncertainty," CPB Discussion Paper 85, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:85
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    References listed on IDEAS

    as
    1. Casper van Ewijk & Nick Draper & Harry ter Rele & Ed Westerhout, 2006. "Ageing and the sustainability of Dutch public finances," CPB Special Publication 61.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2012. "The Excess Burden of Government Indecision," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 125-164.
    3. Lumsdaine, Robin L. & Mitchell, Olivia S., 1999. "New developments in the economic analysis of retirement," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 49, pages 3261-3307, Elsevier.
    4. Alex Armstrong & Nick Draper & Ed Westerhout, 2008. "The impact of demographic uncertainty on public finances in the Netherlands," CPB Discussion Paper 104, CPB Netherlands Bureau for Economic Policy Analysis.
    5. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
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    7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    8. Jan Bonenkamp & Martijn van de Ven, 2006. "A small stochastic model of a pension fund with endogenous saving," CPB Memorandum 168, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Kingston, G., 1989. "Should Marginal Tax Rates Be Equalized Through Time?," Papers 89-8, New South Wales - School of Economics.
    10. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    11. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    12. Casper van Ewijk & Nick Draper & Harry ter Rele & Ed Westerhout, 2006. "Ageing and the sustainability of Dutch public finances," CPB Special Publication 61, CPB Netherlands Bureau for Economic Policy Analysis.
    13. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    14. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    15. Nick Draper & Alex Armstrong, 2007. "GAMMA; a simulation model for ageing, pensions and public finances," CPB Document 147, CPB Netherlands Bureau for Economic Policy Analysis.
    16. Auerbach,Alan J. & Lee,Ronald D. (ed.), 2001. "Demographic Change and Fiscal Policy," Cambridge Books, Cambridge University Press, number 9780521662444, September.
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    Cited by:

    1. Christopher Ball & John Creedy & Grant Scobie, 2015. "Long-run Fiscal Projections under Uncertainty: The Case of New Zealand," Treasury Working Paper Series 15/10, New Zealand Treasury.
    2. Christopher Ball & John Creedy, 2014. "Tax policy with uncertain future costs: Some simple models," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 240-253, August.
    3. Christopher Ball & John Creedy, 2014. "Tax policy with uncertain future costs: Some simple models," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 240-253, August.
    4. Christopher Ball & John Creedy & Grant Scobie, 2015. "Long-run Fiscal Projections under Uncertainty: The Case of New Zealand," Treasury Working Paper Series 15/10, New Zealand Treasury.
    5. Du, C. & Muysken, J. & Sleijpen, O.C.H.M., 2010. "Economy wide risk diversification in a three-pillar pension system," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Du, C. & Muysken, J. & Sleijpen, O.C.H.M., 2010. "Economy wide risk diversification in a three-pillar pension system," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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