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Aging and the Financing of Social Security in Switzerland

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  • Christian Keuschnigg
  • Mirela Keuschnigg
  • Christian Jaag

Abstract

This paper studies the quantitative impact of aging on the financing of social security and the public sector in Switzerland. Demographic projections forecast a doubling of the dependency ratio until 2050 as well as an increase of 10% in total population due to longer life expectancy. We use a computational growth model with overlapping generations, including labor market adjustment on five different behavioural margins: labor market participation, hours worked, job search, retirement, and on-the-job training. Starting with a passive fiscal strategy, our simulations show that a doubling of the old age dependency ratio might reduce per capita income by more than 20 percent and necessitate a long-run increase of wage taxes and social security contributions by 21 percentage points. A comprehensive reform package, including an increase in the effective retirement age to 68 years and several other measures, may limit the increase of the tax burden to 4 percentage points of the value added tax and reduce the decline of per capita income to 6% in the long-run. firms typically have a high growth potential, need external funds to finance investment, and rely on the key effort and know-how of inside entrepreneurs. Given the limited amount of tangible assets and the non-contractible nature of entrepreneurial effort, these firms are often financially constrained. Access to external funds becomes an important factor in the expansion of innovative industries. This paper models a two sector economy of innovative and standard industries and shows how the pattern of comparative advantage is shaped by factor endowments and variables relating to corporate finance. In particular, a larger equity ratio of young entrepreneurial firms and tough corporate governance standards relax the financing constraints and create a comparative advantage in innovative industries.

Suggested Citation

  • Christian Keuschnigg & Mirela Keuschnigg & Christian Jaag, 2009. "Aging and the Financing of Social Security in Switzerland," University of St. Gallen Department of Economics working paper series 2009 2009-26, Department of Economics, University of St. Gallen.
  • Handle: RePEc:usg:dp2009:2009-26
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    Cited by:

    1. Grossmann Volker & Strulik Holger, 2019. "Optimal Social Insurance and Health Inequality," German Economic Review, De Gruyter, vol. 20(4), pages 913-948, December.
    2. Christian Keuschnigg & Mirela Keuschnigg & Christian Jaag, 2011. "Aging and the Financing of Social Security in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(II), pages 181-231, June.
    3. Christian Keuschnigg, 2016. "Aging, Taxes and Pensions in Switzerland," CESifo Working Paper Series 5714, CESifo.
    4. Martin Fochmann & Florian Sachs & Abdolkarim Sadrieh & Joachim Weimann, 2018. "The two sides of public debt: Intergenerational altruism and burden shifting," PLOS ONE, Public Library of Science, vol. 13(8), pages 1-27, August.
    5. Afrika Ndongozi-Nsabimana, 2020. "Tax revenues and social protection financing in African and Latin American countries," Post-Print hal-03098695, HAL.
    6. Buchmann, Manuel, 2020. "The Effect of Demographic Change on the Swiss Labor Market: The Role of Participation Rates," Working papers 2020/10, Faculty of Business and Economics - University of Basel.
    7. Ann Barbara Bauer & Reiner Eichenberger, 2018. "Worsening Workers' Health by Lowering Retirement Age: The Malign Consequences of a Benign Reform," CREMA Working Paper Series 2018-02, Center for Research in Economics, Management and the Arts (CREMA).

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    More about this item

    Keywords

    Aging; social security; retirement; human capital; unemployment;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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