Facing Demographic Challenges: Pension Cuts or Tax Hikes

48 Pages Posted: 18 Jan 2016

See all articles by George Kudrna

George Kudrna

University of New South Wales (UNSW)

Chung Tran

Australian National University (ANU) - School of Economics

Alan D. Woodland

University of New South Wales

Date Written: December 2016

Abstract

In this paper, we investigate two fiscal policy options to mitigate fiscal pressure arising from ageing of the Australian population: pension cuts or tax hikes. Using a computable overlapping generations model, we find that while both policy options achieve the same fiscal goal, the macroeconomic and welfare outcomes differ significantly. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance government spending commitments. Interestingly, taxing consumption or income results in opposing macroeconomic and welfare effects. Increases in the consumption tax rate have positive effects on labour supply, domestic assets and output (similar to pension cuts), but reduce the welfare of low income households most. Conversely, increases in progressive income or payroll taxes have negative effects on the economy but reduce the welfare of low income households least. Our results highlight the intra- and inter-generational conflicts of interest and political constraints when implementing any structural fiscal reforms.

Keywords: demographic transition, fiscal policy, welfare, overlapping generations

Suggested Citation

Kudrna, George and Tran, Chung and Woodland, Alan D., Facing Demographic Challenges: Pension Cuts or Tax Hikes (December 2016). CESifo Working Paper Series No. 5644, Available at SSRN: https://ssrn.com/abstract=2717450

George Kudrna

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Chung Tran

Australian National University (ANU) - School of Economics ( email )

Arndt Building 25B
Canberra, Australian Capital Territory 0200
Australia

Alan D. Woodland (Contact Author)

University of New South Wales ( email )

School of Economics
Sydney, NSW 2052
Australia
61293859707 (Phone)
61293136337 (Fax)

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