FISCAL SUSTAINABILITY AND DEMOGRAPHIC CHANGE. ESRI Research Bulletin 2017/07

Ongoing long-term demographic changes are widely considered a risk to fiscal sustainability in developed countries. A shrinking labour force, combined with a growing old age dependency ratio, is expected to reduce tax revenues and raise pension expenditures in the future. This may threaten government capacity to fund social welfare systems and provide other public goods. The issue is more relevant in the aftermath of the Great Recession, which has weakened governments’ fiscal positions, even before these demographic developments. This paper assesses to what extent concerns about future fiscal budgets in Europe are justified. Pension systems in virtually all industrialized countries have been subject to recent reforms in order to stabilise fiscal budgets. Taking the example of a further increase in the statutory retirement age as a potential policy reaction to demographic change, this paper projects the likely fiscal consequences