Working Paper: NBER ID: w29700
Authors: Assaf Razin; Alexander Horst Schwemmer
Abstract: It has been well recognized that population ageing could generate structural changes centered around the dwindling labor force, on one hand, and the expanding dependency on the generosity of the welfare state, on the other hand. Ageing-related welfare state policy entails both fiscal issues and migration issues. The paper employs a general-equilibrium model with a policy-making focus, to help understand the mechanism governing the provision of social benefits, labor income taxation, capital income taxation, migration curbs on low skilled and high skilled, driven by the ageing of the population. Greater generosity of the welfare state comes together with policy-- incentive compatible with the interests of the majority voters-- of a more liberal migration policy. Effects of ageing on the tax and benefit sides of the welfare state depends on the size of dependents in the population and on 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) turns into labor-scarce country (high retirement). Parallel to the evolution of the labor force, a capital-importer country (high rate of return) becomes capital-exporter (low rate of return). Greater ageing-related demand for social benefits is balanced against the rising cost of labor income taxation, and capital income taxation.
Keywords: Population ageing; Welfare state; Social benefits; Taxation; Migration
JEL Codes: F2; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| population ageing (J11) | structural changes in the labor force (J21) |
| structural changes in the labor force (J21) | generosity of the welfare state (I38) |
| population ageing (J11) | demand for social benefits (H55) |
| demand for social benefits (H55) | adjustments in labor income and capital income taxation (H31) |
| capital-importing countries (F21) | tax burden shared with foreigners (H87) |
| capital-exporting countries (F32) | tax skew leans towards labor income (H31) |
| migration policies (F22) | alleviate fiscal burden on welfare state (H53) |
| demographic composition (J11) | effects of ageing on tax and benefit structure (J26) |
| economic context (E66) | effects of ageing on tax and benefit structure (J26) |