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Discussion Paper Details

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

Author(s): Torben M Andersen

Publication Date: November 2008

Keyword(s): fertility, fiscal sustainability, longevity and Tax smoothing

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Andersen, T. 2008. 'Fiscal Sustainability and Demographics - Should We Save or Work More?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7044