Ageing and the Tax Implied in Public Pension Schemes: Simulations for Selected OECD Countries* Robert Fenge / Martin Werding Ifo Institute for Economic.

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Presentation transcript:

Ageing and the Tax Implied in Public Pension Schemes: Simulations for Selected OECD Countries* Robert Fenge / Martin Werding Ifo Institute for Economic Research & CESifo * Generous support by the Economic and Social Research Institute (ESRI) of the Japanese Government is gratefully acknowledged.

The Impact of Ageing on Public Pensions Concepts of measurement: Net pension liabilities General government fiscal balances Generational accounting “Implicit taxes”

Implicit taxes: definition #1 Implicit tax falling on “generation t”: IT t = NPV (contributions t ) – NPV (benefits t+1 ) Implicit tax rate:  t = IT t / w t = [  t w t – p t+1 / (1+r t +1 )] / w t = Extension to an N-period setting...

Implicit taxes: definition #2 straightforward from the simple algebra of pensions well-founded in pension theory (Sinn 2000) :  0 < 0; N 0  0 = –ID 0 ; ID 0 =  N t  t, t = 1  easy to apply to an empirical context (Thum / Weizsaecker 2000; Fenge / Werding 2001) suited to analyse welfare effects at an individual level

Implicit taxes: application to real-world pension schemes Financial projections for public pension schemes in selected OECD countries (CESifo Pension Model) Stylised biographies for representative individuals (covering disability pensions, old-age pensions, and survivor pensions) The rôle of assumptions... Impact of policy responses

The anatomy of our results: Germany #1

The anatomy of our results: Germany #2

Incremental reforms: Germany

Fixing contribution rates: Austria

CPI indexation (p. after award): France

CPI indexation (p. at award): UK

Partial pre-funding: USA

A “funded” system: Japan

Concluding remarks Not surprisingly, ageing causes a general upward trend in implicit tax rates Levels and curvatures of tax profiles are highly country-specific Effectiveness of different policy measures can be illustrated Is tax smoothing useful?

Annex

The standardised agent’s biography* * Basic assumptions for the case of Germany. Probability of disablement and conditional life expectancies adapted to national averages.

UK: The impact of wage indexation

UK: The effects of contracting-out