Working Paper: CEPR ID: DP16442
Authors: Assaf Razin; Alexander Schwemmer
Abstract: It has been widely recognized that population ageing could generate structural changes centered around a dwindling labor force, on one hand, and an expanding dependency on the generosity of the welfare state, on the other hand. Welfare state policy related to population ageing entails both fiscal and migration issues. This paper employs a general-equilibrium model with a policy making focus to help illuminate the mechanisms governing social benefit provision, labor income taxation, capital income taxation, and migration curbs on low-skilled and high-skilled workers, all driven by population ageing. Greater generosity of the welfare state comes together with a more liberal migration policy when incentives are compatible with the interests of the majority of voters. The effects of ageing on the tax and benefit sides of the welfare state depend on the number of dependents in the population and whether the country is a capital importer (in which case the capital tax burden is shared with foreigners) or a capital exporter (in which case the age-related wage increase skews taxation towards labor income). Low ageing evolution correlates with a relatively labor-abundant country (low retirement), which turns into a labor-scarce country (high retirement). Parallel to the evolution of the labor force, a country that is a capital importer (with a high rate of return) becomes a capital exporter (with a low rate of return). Greater demand for social benefits from an ageing population is balanced against the rising costs of labor income taxation and capital income taxation.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in dependency ratio (J19) | increase in social benefit provision (H53) |
| increase in dependency ratio (J19) | increase in labor and capital income taxes (H31) |
| population ageing (J11) | structural shift towards dwindling labor force (J21) |
| effects of ageing on taxation (J26) | depend on capital import/export status (F21) |
| greater welfare state generosity (D69) | more liberal migration policies (J68) |
| economic interests of income groups (E25) | different policy outcomes in taxation and benefits (H29) |