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Ageing and the Tax Implied in Public Pension Schemes: Simulations for Selected OECD Countries

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Author Info
Robert Fenge ()
Martin Werding ()

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Abstract

A key figure which can be applied to measuring inter-generational imbalances involved in existing public pension schemes is given by the "implicit tax" that is levied on each generation's life-time income through participation in these systems. The implicit tax arises from the fact that, quite generally, pension benefits received fall short of actuarial returns to contributions (i.e., "explicit" social security taxes) paid while actively working. If, in spite of large-scale demographic ageing, public pension schemes are continued to be run based on current rules, implicit tax rates will sharply increase for generations who are currently young when compared to those who are already approaching retirement. In the paper, this will be illustrated for the cases of France, Germany, Italy, Japan, Sweden, the UK, and the US. The results are based on simulations covering representative individuals in all age cohorts born from 1940 to 2000. At the same time, there are striking differences across countries regarding both the level of implicit taxes and their time paths over successive age cohorts, which can be attributed to different ageing processes as well as to different institutional features of national pension systems. In addition, we are studying the impact of pension reforms that were recently enacted or are currently under way, thus demonstrating how effective the measures taken are in terms of smoothing the inter-generational profile of implicit tax rates.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 841.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_841

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Related research
Keywords: demographic ageing; public pensions; pension reform; inter-generational redistribution; international comparisons;

Other versions of this item:

Find related papers by JEL classification:
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martin Werding, 2005. "Survivor Benefits and the Gender Tax Gap in Public Pension Schemes: Observations from Germany," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Jaag, Christian / Keuschnigg, Christian / Keuschnigg, Mirela, 2007. "Pension Reform, Retirement and Life-Cycle Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Christina Elschner & Robert Schwager, 2006. "A Simulation Method to Measure the Tax Burden on Highly Skilled Manpower," cege – Center for European, Governance and Economic Development Research Discussion Papers 50, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
  4. Heikki Oksanen, 2005. "Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Heikki Oksanen, 2004. "Public Pensions in the National Accounts and Public Finance Targets," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Markus Knell, 2005. "On the Design of Sustainable and Fair PAYG Pension Systems When Cohort Sizes Change," Working Papers 95, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  7. Walter H. Fisher & Christian Keuschnigg, 2007. "Pension Reform and Labor Market Incentives," University of St. Gallen Department of Economics working paper series 2007 2007-13, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  8. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2005. "Chapter 4: Pensions and Children," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 69-101, 03. [Downloadable!]
  9. Robert Fenge & Martin Werding, 2003. "Ageing and Fiscal Imbalances Across Generations: Concepts of Measurement," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  10. Rydell, Ingrid, 2005. "Equity, Justice, Interdependence: Intergenerational Transfers and the Ageing Population," Arbetsrapport 2005:5, Institute for Futures Studies. [Downloadable!]
  11. Hans-Werner Sinn, 2005. "Europe’s Demographic Deficit A Plea For A Child Pension System," De Economist, Springer, vol. 153(1), pages 1-45, December. [Downloadable!] (restricted)
  12. Sinn, Hans-Werner, 2005. "Europe's Demographic Deficit," Discussion Papers in Economics 934, University of Munich, Department of Economics. [Downloadable!]
  13. Martin Werding, 2005. "Survivor Benefits and the Gender Tax-Gap inPublic Pension SchemesWork Incentives and Options for Reform," Ifo Working Paper Series Ifo Working Paper No.7, Ifo Institute for Economic Research at the University of Munich. [Downloadable!]
  14. Marko Köthenbürger & Panu Poutvaara & Paola Profeta, 2005. "Why are More Redistributive Social Security Systems Smaller? A Median Voter Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  15. Elschner, Christina & Schwager, Robert, 2004. "A Simulation Method to Measure the Tax Burden on Highly Skilled Manpower," ZEW Discussion Papers 04-59, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  16. Verbist G, 2005. "Replacement Incomes And Taxes: A Distributional Analysis For The Eu 15 Countries," EUROMOD Working Papers EM2/05, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
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