Fiscal implications of population ageing

Abstract

In all developed countries the fiscal ties of the tax and benefit system serve to complement, and sometimes substitute for, traditional family bonds between young and old. Older people are major recipients of public pensions and public health care systems. Since these public transfers and services are financed primarily from the taxes paid by people of working age, the welfare system in effect transfers resources from young to old. But rather than see the fiscal interdependency between young and old as being analogous to the ties that bind children, parents and grandparents together in familial networks, it is often interpreted as an oppressive burden that the old place on the young. This paper examines arguments that population ageing will exacerbate this burden, and may lead to the collapse of public welfare systems. It shows that the financial problems currently associated with public pensions are a function of system design rather than demographic change, and that wholesale privatization of pension systems will do little to solve the major dilemma: of persuading people to transfer a larger part of their lifetime income to their later years in order to sustain a reasonable standard of living throughout an ever lengthening period of retirement.