Research Discussion Papers, Bank of Finland
No 28/2008:
Population ageing and fiscal sustainability in Finland: a stochastic analysis
Jukka Lassila ()
and Tarmo Valkonen ()
Abstract: This study analyses the fiscal sustainability of the
Finnish public sector using stochastic projections to describe uncertain
future demographic trends and asset yields. While current tax rates are
unlikely to yield sufficient tax revenue to finance public expenditure with
an ageing population, if developments are as expected, the problem will not
be very large. However, there is a small, but not negligible, probability
that taxes will need to be raised dramatically, perhaps by over 5
percentage points. Such outcomes, if realised, could destabilise the entire
welfare state. The study also analyses three policy options aimed at
improving sustainability. Longevity adjustment of pension benefits and
introduction of an NDC pension system would reduce the expected problem and
narrow the sustainability gap distribution. Under the third option, pension
funds would invest more in equities and expect to get higher returns. This
policy also limits the sustainability problem, but only under precondition
that policymakers in the future can live with substantially larger
variation in the value of the funds without adjusting tax rules or
benefits.
Keywords: public finance; fiscal sustainability; uncertainty; stochastic simulations; (follow links to similar papers)
JEL-Codes: H30; H62; H63; J11; (follow links to similar papers)
71 pages, December 3, 2008
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