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

Torben M Andersen

No 7044, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Fertility; Fiscal sustainability; Longevity; Tax smoothing (search for similar items in EconPapers)
JEL-codes: E60 H50 J11 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-age, nep-cba and nep-mac
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Citations: View citations in EconPapers (1)

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