Smoothing the Fiscal Costs of Population Ageing in Australia: Effects on Intergenerational Equity and Social Welfare*

Abstract

This paper applies an overlapping generations model in order to evaluate the case for smoothing the fiscal costs associated with population ageing. The motivation is the establishment in Australia of the Future Fund which acts to smooth the tax burden over time. The conclusion is that tax smoothing of the order implied by the Future Fund yields a gain in social welfare in the order of 1.0 per cent in equivalent annual increases in GDP. All current generations of workers and retired workers are worse off, with middle‐aged workers the worst affected, but future generations are better off and by larger magnitudes.