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Uncertain Demographics and Fiscal Sustainability
Thereiswidespreadacceptancethatmuchofthedevelopedworldfaces
apotentialpensionsandwelfarecrisisasaresultofdecliningbirthrates
and an ageing population. However, there is considerable uncertainty
aboutthespecificsofdemographicforecastingandthishassignificant
implicationsforpublicfinances.UncertainDemographicsandFiscalSus-
tainability addresses the economic consequences of uncertainty and,
withparticularreferencetoEuropeaneconomies,explorestheimpactof
demographicrisksonpublicfinances,includingpensionsystems,health
care and old-age care expenditures. Covering a spectrum of theoreti-
calandempiricalapproaches,differenttypesofcomputationalmodels
are used to demonstrate not only the magnitudes of the uncertainties
involvedbutalsohowthesecanbeaddressedthroughpolicyinitiatives.
The book is divided into four parts covering demographic, measure-
ment, policy and methodological issues. Each part is followed by a
discussion essay that draws out key elements and identifies common
themes.
. isProfessorofStatisticsattheUniversityofJoensuu,
Finland.Heistheauthor(withBruceD.Spencer)ofStatisticalDemogra-
phyandForecasting(2005)andaformerpresidentoftheFinnishSociety
ofBiostatistics.
. is Managing Director of the
Copenhagen-based Centre for Economic and Business Research
(CEBR),ProfessorofEconomicsatCopenhagenBusinessSchooland
amemberoftheDanishCouncilforResearchPolicy.
is Research Director at the Research Institute of
the Finnish Economy (ETLA) in Helsinki. He has co-ordinated
several international research projects concerning population ageing
and was scientific co-ordinator in the EU Fifth Framework research
project ‘Demographic Uncertainty and the Sustainability of Social
WelfareSystems’.
Uncertain Demographics and
Fiscal Sustainability
Editedby
Juha M. Alho, Svend E. Hougaard Jensen and
Jukka Lassila
CAMBRIDGEUNIVERSITYPRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo
Cambridge University Press
The Edinburgh Building, Cambridge CB28RU, UK
Published in the United States of America by Cambridge University Press, New York
www.cambridge.org
Information on this title: www.cambridge.org/9780521877404
© Cambridge University Press 2008
This publication is in copyright. Subject to statutory exception and to the provision of
relevant collective licensing agreements, no reproduction of any part may take place
without the written permission of Cambridge University Press.
First published in print format 2008
ISBN-13 978-0-511-38811-8 eBook (NetLibrary)
ISBN-13 978-0-521-87740-4 hardback
Cambridge University Press has no responsibility for the persistence or accuracy of urls
for external or third-party internet websites referred to in this publication, and does not
guarantee that any content on such websites is, or will remain, accurate or appropriate.
Contents
Listoffigures page vii
Listoftables xi
Listofcontributors xiv
Preface xvi
1 Introduction 1
. , .
PartI Uncertaindemographics
2 Changingviewsoffuturedemographictrends 11
,
.
3 Empiricallybasedspecificationofforecastuncertainty 34
. ,
Comment:TheUPEforecasts:strengths,innovations,
developments 55
PartII Measuringsustainabilityinastochastic
environment
4 Fiscalimplicationsofdemographicuncertainty:
comparisonsacrosstheEuropeanUnion 65
5 Demographicuncertaintyandpensionprojections 82
v
vi Contents
6 Demographicuncertaintyandhealthcareexpenditure 94
Comment:Assessingtheuncertaintyinlong-termfiscal
projections 109
PartIII Enhancingsustainability
7 EvaluatingpensionreformsintheGermancontext 117
8 Longevityadjustmentofpensionbenefits 137
9 Ageing,demographicuncertaintyandoptimal
fiscalpolicy 161
, ,
Comment:Computableequilibriummodelsinpolicy
analysis:futuredirections 184
.
PartIV Extensions
10 Macro-economicconsequencesofdemographic
uncertaintyinworldregions 195
.
11 Informationalassumptions,aggregatemortalityrisk
andlife-cyclesaving 219
.
12 Uncertaindemographics,longevityadjustmentofthe
retirementageandintergenerationalrisk-sharing 239
.
13 Ageneralequilibriumanalysisofannuityratesinthe
presenceofaggregatemortalityrisk 258
Comment:Theeconomicsofdemographicuncertainty 270
Index 275
Figures
2.1 Forecastsofaverageannualrateofpopulationgrowth
inEEA+countriesto2050.Averagesacrosseighteen
EEA+countries(UN,UPE)andfifteenEU-15
countries(Eurostat) page15
2.2 TotalfertilityrateassumptionsinEEA+countries,
2045–2049.AveragesacrosseighteenEEA+countries
(UN,UPE)andfifteenEU-15countries(Eurostat) 16
2.3 TotalfertilityrateineighteenEEA+countries,
1900–2000 18
2.4 LifeexpectancyassumptionsinEEA+countries,
2045–2049.AveragesacrosseighteenEEA+countries
(UN,UPE)andfifteenEU-15countries(Eurostat) 22
2.5 LifeexpectancyatbirthineighteenEEA+countries,
1900–2000 23
2.6 NetmigrationassumptionsinEEA+countries,
2045–2049.AveragesacrosseighteenEEA+countries
(UN,UPE)andfifteenEU-15countries(Eurostat) 26
3.1 Scalesforage-specificmortalityinforecastyear1and
forecastyear47 46
3.2 Relativestandarddeviationofage-specificmortalityfor
ages40+ 47
3.3 Distributionofgrossmigrationbyage:malesand
females 49
IC.1 Volatilityofbirthcohorts:Sweden,1900–2005 57
IC.2 Growthof1–5cohort:Sweden,2010–2020 58
IC.3 Growthof1–5cohort:Sweden,2040–2050 59
IC.4 UPEassumptionsfordistributionofageatdeath:
Sweden,2002and2048 60
4.1 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:Belgium 76
4.2 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:Finland 76
vii
viii Listoffigures
4.3 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:inGermany 77
4.4 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:TheNetherlands 78
4.5 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:Spain 78
4.6 Frequencydistributionofthetaxincreaseneededto
restorelong-termfiscalbalance:UnitedKingdom 79
6.1 Per-capitapublichealthexpenditure(as%of
GDP/capita)byage 96
6.2 Forecastofold-agedependencyratioinSpain 98
6.3 Forecastedpublichealthexpenditure(2004=1)in
Spain 99
6.4 Effectofdistinguishingsurvivalstatusonhealth
expenditure:50%predictionintervalofpublichospital
expenditure(2004=1) 103
6.5 Importanceofcostpressureinhealthexpenditure
(2004=1):effectofadditional1%annualincreasein
age-specifichealthexpenditure(+) 105
IIC.1 Histogram:increaseinage-relatedspendingin2050
(percentagepointsofGDP) 111
7.1 Totalpopulation 121
7.2 Old-agedependencyratio(populationaged65–100/
populationaged20–64),2004–2050 122
7.3 Pensioncontributionrates,2004–2050 127
7.4 Healthcarecontributionrates,2004–2050 128
7.5 Consumptiontaxrates,2004–2050 129
7.6 Replacementratesofreformoptions,2004–2050 130
7.7 Contributionratesofreformoptions,2004–2050 131
7.8 Expectedwelfareeffectsofthepensionreforms(as
percentageofremaininglifetimeresources) 132
7.9 Intergenerationalrisk-sharingimplications(normalized
ratioofstandarddeviation) 134
8.1 PensioncontributionandreplacementratesinFinland
in2030and2050 151
8.2 Sustainabilityandadequacy 153
8.3 Theeffectoflongevityadjustmentontheactuarityrates
ofthreecohorts 155
9.1 Optimaltaxpolicycurveinthedeterministicscenario 170
9.2 Stochasticdistributionofthetotaldependencyratio 172
9.3 Distributionofrequiredlabourincometaxincreases 173
