Research Discussion Papers, Bank of Finland
The effects of aging population on the sustainability of fiscal policy
Abstract: We study the effects of aging population on the
sustainability of fiscal policy in overlapping generations models with
government debt and a pay-as-you-go pension system. The smaller the
population growth rate, the lower the maximum sustainable level of
deficits. When the utility function is of a specific form, an increase in
the payroll tax rate and the replacement rate decreases the level of
maximum sustainable deficits; except in the case when pension depends on
the wage level prevailing during the working period. The ratio of the
deficits in two economies with different population growth rates is
characterized with numerical examples.
Keywords: aging; pensions; overlapping generations; fiscal policy; (follow links to similar papers)
JEL-Codes: E21; E32; (follow links to similar papers)
32 pages, October 11, 2005
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