Facing Demographic Challenges: Pension Cuts or Tax Hikes

George Kudrna (), Chung Tran and Alan Woodland

No 5644, CESifo Working Paper Series from CESifo

Abstract: In this paper, we investigate two fiscal policy options to mitigate fiscal pressure arising from ageing of the Australian population: pension cuts or tax hikes. Using a computable overlapping generations model, we find that while both policy options achieve the same fiscal goal, the macroeconomic and welfare outcomes differ significantly. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance government spending commitments. Interestingly, taxing consumption or income results in opposing macroeconomic and welfare effects. Increases in the consumption tax rate have positive effects on labour supply, domestic assets and output (similar to pension cuts), but reduce the welfare of low income households most. Conversely, increases in progressive income or payroll taxes have negative effects on the economy but reduce the welfare of low income households least. Our results highlight the intra- and inter-generational conflicts of interest and political constraints when implementing any structural fiscal reforms.

Keywords: demographic transition; fiscal policy; welfare; overlapping generations (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: FACING DEMOGRAPHIC CHALLENGES: PENSION CUTS OR TAX HIKES? (2019)
Working Paper: Facing Demographic Challenges: Pension Cuts or Tax Hikes (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5644

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