DP11978 Population Aging, Social Security and Fiscal Limits

Author(s): Burkhard Heer, Vito Polito, Michael R. Wickens
Publication Date: April 2017
Keyword(s): Dependency Ratio, Fiscal space, Laffer Effects, Pensions
JEL(s): E62, H20
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11978

We study the sustainability of pension systems using a life-cycle model with distortionary taxation that sets an upper limit to the real value of tax revenues. This limit implies an endogenous threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the threshold using a computable life-cycle model calibrated on the United States and on 14 European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.