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

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Ageing and the Tax Implied in Public Pension
SchemesSimulations 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.
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The Impact of Ageing on Public Pensions

• Concepts of measurement
• Net pension liabilities
• General government fiscal balances
• Generational accounting
• Implicit taxes

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Implicit taxes definition 1

• Implicit tax falling on generation t ITt
  NPV (contributionst) NPV (benefitst1)
• Implicit tax rate qt ITt / wt ttwt
  pt1 / (1rt 1) / wt

• Extension to an N-period setting ...

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Implicit taxes definition 2

• straightforward from the simple algebra of
  pensions
• well-founded in pension theory (Sinn 2000) q0
  lt 0 N0q0 ID0 ID0 S Ntqt, t 1??
• easy to apply to an empirical context (Thum /
  Weizsaecker 2000 Fenge / Werding 2001)
• suited to analyse welfare effects at an
  individual level

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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

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The anatomy of our results Germany 1
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The anatomy of our results Germany 2
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Incremental reforms Germany
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Fixing contribution rates Austria
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CPI indexation (p. after award) France
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CPI indexation (p. at award) UK
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Partial pre-funding USA
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A funded system Japan
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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?

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Annex
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The standardised agents biography
Basic assumptions for the case of Germany.
Probability of disablement and conditional life
expectancies adapted to national averages.
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UK The impact of wage indexation
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UK The effects of contracting-out