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

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)

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

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  1. 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.

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

  3. Implicit taxes: definition #1 • Implicit tax falling on “generation t”:ITt = NPV (contributionst) – NPV (benefitst+1) • Implicit tax rate:qt = ITt / wt = [ttwt – pt+1 / (1+rt +1)] / wt = • Extension to an N-period setting ...

  4. Implicit taxes: definition #2 • straightforward from the simple algebra of pensions • well-founded in pension theory (Sinn 2000):q0 < 0; N0q0 = –ID0; ID0 = SNtqt,t = 1 • easy to apply to an empirical context (Thum / Weizsaecker 2000; Fenge / Werding 2001) • suited to analyse welfare effects at an individual level

  5. Implicit taxes: applicationto 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

  6. The anatomy of our results: Germany #1

  7. The anatomy of our results: Germany #2

  8. Incremental reforms: Germany

  9. Fixing contribution rates: Austria

  10. CPI indexation (p. after award): France

  11. CPI indexation (p. at award): UK

  12. Partial pre-funding: USA

  13. A “funded” system: Japan

  14. 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?

  15. Annex

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

  17. UK: The impact of wage indexation

  18. UK: The effects of contracting-out

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