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Fiscal Sustainability and Demographics - Should We Save or Work More?

  • Andersen, Torben M
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    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. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed. It is argued that 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 retirement ages to longevity.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7044.

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    Date of creation: Nov 2008
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    Handle: RePEc:cpr:ceprdp:7044
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    1. de la Croix, David & Mahieu, Géraldine & Rillaers, Alexandra, 2000. "How should retirement policy adjust to the baby bust ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Boris Cournède & Frédéric Gonand, 2006. "Restoring Fiscal Sustainability in the Euro Area: Raise Taxes or Curb Spending?," OECD Economics Department Working Papers 520, OECD Publishing.
    3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    4. Martin FlodÈn, 2003. "Public Saving and Policy Coordination in Aging Economies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 379-400, 09.
    5. Oecd, 2006. "Projecting OECD Health and Long-Term Care Expenditures: What Are the Main Drivers?," OECD Economics Department Working Papers 477, OECD Publishing.
    6. Andersen, Torben M., 2008. "Increasing longevity and social security reforms--A legislative procedure approach," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 633-646, April.
    7. Mulligan Casey B & Sala-i-Martin Xavier, 2004. "Political and Economic Forces Sustaining Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-56, May.
    8. Padilla, Emilio, 2002. "Intergenerational equity and sustainability," Ecological Economics, Elsevier, vol. 41(1), pages 69-83, April.
    9. Galasso, Vincenzo & Profeta, Paola, 2002. "The political economy of social security: a survey," European Journal of Political Economy, Elsevier, vol. 18(1), pages 1-29, March.
    10. Daniel Leigh & David Hauner & Michael Skaarup, 2007. "Ensuring Fiscal Sustainability in G-7 Countries," IMF Working Papers 07/187, International Monetary Fund.
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