Fiscal Sustainability and Demographic Change: A Micro Approach for 27 EU Countries

41 Pages Posted: 11 Jan 2016

See all articles by Mathias Dolls

Mathias Dolls

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; IZA Institute of Labor Economics

Karina Doorley

University College Dublin (UCD)

Alari Paulus

University of Essex - Institute for Social and Economic Research (ISER)

Hilmar Schneider

IZA Institute of Labor Economics; DIW Berlin, German Institute for Economic Research

Sebastian Siegloch

IZA Institute of Labor Economics; University of Mannheim - Department of Economics; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research; CESifo (Center for Economic Studies and Ifo Institute)

Eric Sommer

IZA Institute of Labor Economics

Abstract

The effect of demographic change on the labor force and on fiscal revenues is topical in light of potential pension shortfalls. This paper evaluates the effect of demographic changes between 2010 and 2030 on labor force participation and government budgets in the EU-27. Our analysis involves the incorporation of population projections, and an explicit modeling of the supply and demand side of the labor market. Our approach overcomes a key shortcoming of most existing studies that focus only on labor supply when assessing the effects of policy reforms. Ignoring wage reactions greatly understates the increase in fiscal revenues, suggesting that fiscal strain from demographic change might be less severe than currently perceived. Finally, as a policy response to demographic change and worsening fiscal budgets, we simulate the increase in the statutory retirement age. Our policy simulations confirm that raising the statutory retirement age can balance fiscal budgets in the long run.

Keywords: demographic change, fiscal effects, labor supply, labor demand, pension systems

JEL Classification: H68, J11, J21

Suggested Citation

Dolls, Mathias and Doorley, Karina and Paulus, Alari and Schneider, Hilmar and Siegloch, Sebastian and Sommer, Eric, Fiscal Sustainability and Demographic Change: A Micro Approach for 27 EU Countries. IZA Discussion Paper No. 9618. Available at SSRN: https://ssrn.com/abstract=2713039

Mathias Dolls (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

HOME PAGE: http://www.cesifo-group.de/ifoHome/CESifo-Group/ifo/ifo-Mitarbeiter/cvifo-dolls_m.html

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Karina Doorley

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

Alari Paulus

University of Essex - Institute for Social and Economic Research (ISER) ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Hilmar Schneider

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

DIW Berlin, German Institute for Economic Research

Mohrenstraße 58
Berlin, 10117
Germany

Sebastian Siegloch

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Eric Sommer

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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