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Private Intergenerational Transfers and Their Ability to Alleviate the Fiscal Burden of Ageing

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  • Hayat Khan

Abstract

The ratio of retirees to workers in developed countries is expected to increase sharply in the next few decades. In the presence of unfunded income support policies, this increase in old age dependency is expected to increase the future fiscal burden which is seen as a threat to living standards. This paper quantifies the ability of private intergenerational transfers to alleviate the future fiscal burden of ageing. This is done through developing an extended dynamic overlapping generations simulation model with realistic demographics. Calculation based on steady state simulations suggests that a bequest to GDP ratio of 1% offsets about 33.3 % of the fiscal burden over the lifecycle when measured as a % of simple labour income and 8.9% of the fiscal burden when measured as % of the full income. The model is calibrated for Australia under small open economy assumption such that the optimal solution mimic important cross sectional and time series fundamentals of the Australian Economy. Intergenerational accounting suggests that the empirically plausible intergenerational transfers are strong enough to offset most of the tax burden (81 to 91%) when measured as % of simple labour income and up to 1/4 of the burden when fiscal burden is measured as % of full income. In the endogenous labour supply case, 81 to 91 percent of the fiscal burden of ageing will be alleviated by inheritances in the base case. Due to the calibration strategy adopted, the paper analytically demonstrates that results of the simulations are robust to the introduction of lifetime uncertainty in the model where people discount the future by a rate of time preference and by a survival probability irrespective of whether there are perfect annuity markets or no annuity markets at all.

Suggested Citation

  • Hayat Khan, 2007. "Private Intergenerational Transfers and Their Ability to Alleviate the Fiscal Burden of Ageing," DEGIT Conference Papers c012_036, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c012_036
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    File URL: http://degit.sam.sdu.dk/papers/degit_12/C012_036.pdf
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    References listed on IDEAS

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    1. Axel Börsch-Supan & Alexander Ludwig & Joachim Winter, 2006. "Ageing, Pension Reform and Capital Flows: A Multi-Country Simulation Model," Economica, London School of Economics and Political Science, vol. 73(292), pages 625-658, November.
    2. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers 553, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990. "An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
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    Keywords

    Ageing; Overlapping Generations (OLG) model; bequests; fiscal;

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