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Population ageing and fiscal sustainability in Finland: a stochastic analysis

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  • Lassila, Jukka
  • Valkonen, Timo

Abstract

This study analyses the fiscal sustainability of the Finnish public sector using stochastic projections to describe uncertain future demographic trends and asset yields. While current tax rates are unlikely to yield sufficient tax revenue to finance public expenditure with an ageing population, if developments are as expected, the problem will not be very large. However, there is a small, but not negligible, probability that taxes will need to be raised dramatically, perhaps by over 5 percentage points. Such outcomes, if realised, could destabilise the entire welfare state. The study also analyses three policy options aimed at improving sustainability. Longevity adjustment of pension benefits and introduction of an NDC pension system would reduce the expected problem and narrow the sustainability gap distribution. Under the third option, pension funds would invest more in equities and expect to get higher returns. This policy also limits the sustainability problem, but only under precondition that policymakers in the future can live with substantially larger variation in the value of the funds without adjusting tax rules or benefits.

Suggested Citation

  • Lassila, Jukka & Valkonen, Timo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Bank of Finland Research Discussion Papers 28/2008, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2008_028
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    File URL: https://www.econstor.eu/bitstream/10419/212119/1/bof-rdp2008-028.pdf
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    References listed on IDEAS

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    1. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(2), pages 139-153, July.
    2. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 43-68, National Bureau of Economic Research, Inc.
    3. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246, National Bureau of Economic Research, Inc.
    4. 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.
    5. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    6. Andrew B. Abel, 2001. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," American Economic Review, American Economic Association, vol. 91(1), pages 128-148, March.
    7. Henning Bohn, 2002. "Government asset and liability management in an era of vanishing public debt," Proceedings, Federal Reserve Bank of Cleveland, pages 887-940.
    8. repec:cdl:ucsbec:1-02 is not listed on IDEAS
    9. Alho, Juha M. & Vanne, Reijo, 2006. "On predictive distributions of public net liabilities," International Journal of Forecasting, Elsevier, vol. 22(4), pages 725-733.
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    Cited by:

    1. Sarris, Alexander, 2009. "Evolving Structure of World Agricultural Trade and Requirements for New World Trade Rules," Conference papers 331831, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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