Population Aging and Risks of Budget Crisis

Abstract

The impact of global aging on fiscal expenditure and possible ways to address this challenge are considered in the article. The authors conclude that if ambitious reforms are not implemented, relative spending on public health and social security may double by mid-XXI century. Pension reform should aim not only at avoiding excessive financial commitments, but more generally at securing due interests of all generations. A new approach to defining optimal pension policy is suggested. It is specified as a policy that mimics choices on work duration and savings, made by a person with full knowledge and long horizon. The best reaction to aging from this viewpoint is an increase in retirement age keeping constant leisure/labor ratio. This strategy ensures the stability of replacement rates and does not affect intergeneration accounts. Longer employment is feasible, as higher life expectancy is accompanied with proportional increase in healthy life expectancy.

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