Population aging: its fiscal impact in selected OECD countries

Abstract

The fiscal implications of the aging population structure in Canada US the Federal Republic of Germany the UK and France were examined. The youth dependency ratio the elderly dependency ratio and the total dependency ratio were calculated for each country for 1976 and for each decade from 2000 through 2040. A simple model was then used to estimate the fiscal burden of these dependency ratios on the taxpaying population. A comparison of the dependency ratios indicated that: 1) in general the total dependency rate for these countries will decline until the 1st of 2nd decade of the next century; 2) the elderly dependency ratio for the Federal Republic of Germany the UK and France will decline until the turn of the century and then it will start to increase; 3) the elderly dependency ration for the US and Canada is relatively low but it will increase throughout the 1976-2040 period; and 4) the youth dependency ratio will decrease for all countries well into the next century. In estimating the fiscal burden of these dependency ratios on the taxpayer in the comming years it was necessary to take into account the fact that per capita public expenditures for the elderly e.g. pensions tend to be greater than per capita expenditures for youths e.g. schools. Estimates were made under 2 different assumptions concerning these costs. These assumptions placed the public cost of providing for a youth. If the public cost of providing for the elderly is assumed to 3 times that of caring for the young the tax burden of supporting dependents will be less than the 1976 tax burden in all 5 countries until about the year 2020. The decline in the dependency tax burden during the 1976-2020 period is due to the fact that: 1) the increase in the elderly dependency burden will be more than offset by the decrease in the youth dependency burden and 2) the working age population will increase in some of these countries during this period. During the 3rd decade of the next century however the dependency tax burden will either equal the 1976 tax burden (France and the UK) or exceed the 1976 tax burden (Canada US and Federal Republic of Germany). Possible policy responses to deal with the heavier tax burdens which will begin around 2020 were examined. Possible remedies to offset the burden include: 1) incentive programs to promote fertility so as to increase the working age population by the year 2020 2) strategies to increase the number of taxpayers in the population by either encouraging female labor force participation or by discouraging the retirement of the elderly and 3) encouraging immigration as a way to alter the age structure of the population. (summary in FRE)