The Impact of Population Aging on Fiscal Policies in Germany

Transcription

1 The Impact of Population Aging on Fiscal Policies in Germany Fanny Annemarie Kluge European NTA Meeting 2011 Budapest Max Planck Institute for Demographic Research, Rostock, Germany MPIDR Aging and Fiscal Policies 1 / 28

2 Motivation Population Aging and Fiscal Policies For more than half their lifetime individuals are dependent on transfers, the productive period lasts around 30 years (Mason 2005). In Germany, the public sector redistributes the majority of resources to the dependent age groups. Rising life expectancy will prolong the dependent period. RQ: Will population aging endanger governmental financial sustainability? MPIDR Aging and Fiscal Policies 2 / 28

3 Motivation Dependency and Economic Support Ratios, Germany Support and dependency ratio (in percent) Support ratio East Support ratio West Total dependency ratio East Total dependency ratio West Year MPIDR Aging and Fiscal Policies 3 / 28

4 Motivation Median Age Across the States MPIDR Aging and Fiscal Policies 4 / 28

5 Motivation Population Aging does not affect the expenditures of the layers of government to the same extent Federal government: national defense, infrastructure, administration, child allowances, federal supplementary grant to social security State governments: education, civil servants pensions, student loans, basic social welfare Local governments: childcare, housing allowances, civil servants pensions, additional long-term care related expenditures Social security: health, long-term care, pensions and unemployment benefits MPIDR Aging and Fiscal Policies 5 / 28

6 Motivation Fiscal Federalism and Government Revenue Fiscal autonomy of subnational government restricted. States have little power to tax but by voting in the Bundesrat they can influence tax legislation considerably. Art. 71 Basic Law: equal living conditions across all states horizontal fiscal equalization scheme; distribution of tax revenue crucially dependent on number of inhabitants in a state. Local governments have significant taxation power: local business tax rate, local property tax. MPIDR Aging and Fiscal Policies 6 / 28

7 Previous studies Earlier studies for the U.S. and Germany U.S.: Lee and Edwards [2002], Lee and Tuljapurkar [1998] and Edwards [2010]. Germany: Bach et al. [2002]; Hofmann et al. [2008]; Seitz [2008a,b]; Seitz et al. [2005]; Seitz and Kempkes [2007] Numerous studies on sub-budgets (e.g. pensions, health care and education). MPIDR Aging and Fiscal Policies 7 / 28

8 Methods and Data How to construct the age profiles? National Transfer Accounts NTA age profiles for public sector variables. Here: Not one macro control but four (Federal, state, local, and social security). Weakness: Accounts only for mean of states or municipalities. Data needed Population estimates by single years of age. Detailed national accounts for the public sector. Micro-survey: Income and Expenditure Survey MPIDR Aging and Fiscal Policies 8 / 28

9 Methods and Data Government expenditures: E t = Government revenues: T j,t = J j=1 J j=1 TG in kind j,t + TG cash j,t. (1) TGO L j,t + TGOA j,t + TGOC j,t + TGOO j,t. (2) MPIDR Aging and Fiscal Policies 9 / 28

10 Methods and Data Table: Monetary public transfers by layer of government and social security, Germany 2003 in billion euros Total Federal Länder Local SocSec Pensions Health Long-term care Unemployment benefits Accident insurance Social Protection Child Allowances Family and Children Other Federal Special Fund Total cash transfers Source: National Accounts, author s own calculations MPIDR Aging and Fiscal Policies 10 / 28

11 Methods and Data Table: Government revenues from shared taxes by layer of government (Federal/State/Local), Germany 2003 in million euros Revenue type Federal State Local Income Tax (42,5/42,5/15) Income Tax (assessed) (42,5/42,5/15) Profits tax (50/50/0) Flat rate tax (44/44/12) Corporate income tax (50/50/0) VAT (49.48/48.45/2.07) Import turnover tax (49.48/48.45/2.07) Total tax revenue from shared taxes Source: National Accounts 2003 MPIDR Aging and Fiscal Policies 11 / 28

12 Methods and Data Table: Micro-profiles used to allocate government revenues according to age Profile Federal State Local Income Income tax Income tax Income tax Solidarity surcharge Self-employed Excise tax Consumption VAT VAT VAT Insurance tax Motor vehicle tax Energy tax Fire brigade tax Electricity tax Capital Corporate Income Tax Corporate Income Tax Land Tax (Forestry) Profits tax Profits tax Land Tax (Other) Flat rate tax Flat rate tax Flat rate tax Property tax Property tax Transfers of capital Inheritance tax Capital transfer tax Real estate transfer tax Tobacco consumption Tobacco tax Coffee consumption Coffee tax Alcohol consumption Spirits tax Beer tax Alcopop tax Betting and lottery tax Sparkling wine tax Other alcohol taxes General tax profile Market selling Market selling Second home tax Other current transfers Other current transfers Taxes dog owning Source: author s own considerations MPIDR Aging and Fiscal Policies 12 / 28

13 Age Profiles of the German Länder Age Profiles of Public Consumption, Länder 2003 Euros Total public consumption Education Health care Other social security Other public consumption Age MPIDR Aging and Fiscal Policies 13 / 28

14 Age Profiles of the German Länder Age Profiles of Monetary Transfers, Länder 2003 Euros Child Allowances Student Loans Social Welfare Housing benefits Pensions Other Age MPIDR Aging and Fiscal Policies 14 / 28

15 Age Profiles of the German Länder Age Profiles of Government Inflows, Länder 2003 Euros Total State Revenue Income Taxes Rev. from Self Employed Taxes on Assets Consumption Taxes Taxes on Alcohol Other Taxes Age MPIDR Aging and Fiscal Policies 15 / 28

16 Social Security Euros Pensions Health care Long term care Accident insurance Unemployment benefits Total social security Age Euros Pensions Unemployment benefits Accident insurance Health care Total federal subsidies Age Figure: Social security Figure: Federal subsidies Source: author s own calculations based on publications by the Federal Statistical Office MPIDR Aging and Fiscal Policies 16 / 28

17 Age profiles for all layers of government Total Public Consumption, Germany 2003 Euros Federal government State government Local government Social security funds Age MPIDR Aging and Fiscal Policies 17 / 28

18 Age profiles for all layers of government Total Cash Transfers, Germany 2003 Euros Federal government State government Local government Age MPIDR Aging and Fiscal Policies 18 / 28

19 Age profiles for all layers of government Total Transfers, Germany 2003 Euros Federal government State government Local government Social security funds Age MPIDR Aging and Fiscal Policies 19 / 28

20 Age profiles for all layers of government Total Revenues, Germany 2003 Euros Age Federal government State government Local government Social security funds MPIDR Aging and Fiscal Policies 20 / 28

21 The Future Table: Public consumption and monetary transfers by layer of government and social security, Germany , in billion euros Public Consumption Federal government State government Local government Social Security Monetary Transfers Federal government State government Local government SocSec National Accounts 2003, 12 th coordinated population projection, NTA estimates, author s own calculations MPIDR Aging and Fiscal Policies 21 / 28

22 The Future Government expenditures in the future Billion euros Social Security Federal State Local MPIDR Aging and Fiscal Policies 22 / 28

23 The Future Table: Government revenues by layer of government and social security, Germany , in billion euros Federal Government State Government Local Government Social Security Contributions Total Government Revenue Source: NTA estimates, Federal Statistical Office, author s own calculations MPIDR Aging and Fiscal Policies 23 / 28

24 The Future Table: Government expenditures, revenues and expected budget gap by layer of government, Germany , in billion euros and percent of GDP in billion euros in percent of GDP Federal Expenditures State Expenditures Local Expenditures Social Security Expenditures Federal Revenue State Revenue Local Revenue Social Security Contributions Federal Budget Gap State Budget Gap Local Budget Gap Social Security Budget Gap Source: NTA estimates, Federal Statistical Office, author s own calculations MPIDR Aging and Fiscal Policies 24 / 28

25 The Future Contribution Rates Percent Total contribution rate Contribution rate pensions Contribution rate health care Contribution rate unemployment Contribution rate long term care Year MPIDR Aging and Fiscal Policies 25 / 28

26 Conclusion State and local governments can expect reduced expenditures. Social Security expenditures increase significantly as does the federal supplementary grant. Overall expenditures increase by 10 percent. At the same time revenues drop to an 80-percent level of today s values. Contribution rates for pensions, health and long-term care increase dramatically in this worst case scenario. MPIDR Aging and Fiscal Policies 26 / 28

27 Next Steps Future Research OLG-Model with realistic demography and public and private transfers. Introduce a demographic factor into the fiscal equalization scheme. MPIDR Aging and Fiscal Policies 27 / 28

28 The End Thank you for your attention! Comments and Questions welcome. MPIDR Aging and Fiscal Policies 28 / 28

29 References Bach, S., Bork, C., Krimmer, P., Raffelhüschen, B., and Schulz, E. (2002). Demographischer Wandel und Steueraufkommen. Gutachten im Auftrag des Bundesfinanzministerium, DIW Materialien, 20. Edwards, R. (2010). Forecasting Government Revenue and Expenditure in the U.S. Using Data on Age-Specific Utilization. Working Paper (accessable via: redwards/papers/edwardsforecasting-0210.pdf). Hofmann, M., Kempkes, G., Seitz, H., München, U., für Wirtschaftsforschung, I.-I., and CESifo (2008). Demographic change and public sector budgets in a federal system. CESifo. Lee, R. and Edwards, R. (2002). The fiscal impact of population aging in the US: Assessing the uncertainties. Tax policy and the economy, 16: MPIDR Aging and Fiscal Policies 28 / 28

30 Lee, R. and Tuljapurkar, S. (1998). Uncertain demographic futures and Social Security finances. American Economic Review, 88(2): Seitz, H. (2008a). Die Demographieabhängigkeit der Ausgaben und Einnahmen der öffentlichen Haushalte: Eine empirische Analyse unter Berücksichtigung der föderalen Verflechtungen. Bertelsmann Stiftung: Gütersloh. Seitz, H. (2008b). The Impact of Demographic Change on Fiscal Policy in Germany. In Hamm, I., Seitz, H., and Werding, M., editors, Demographic Change in Germany, pages Springer. Seitz, H., Freigang, D., and Kempkes, G. (2005). Demographic Change and Federal Systems. Spatial Aspects of Federative Systems, Speyerer Forschungsbericht, 242: Seitz, H. and Kempkes, G. (2007). Fiscal Federalism and Demography. Public Finance Review, 35(3): MPIDR Aging and Fiscal Policies 28 / 28