Fiscal policy and population ageing (DEMEC)

Aging populations pose a challenge to the fiscal and macroeconomic stability of many societies through increased government spending on pension, healthcare, and social benefits programs for the elderly. This may hurt economic growth and overall quality of life if governments need to divert public spending from education and infrastructure investment to finance programs for the elderly. In addition, the recent economic crisis not only increased the demand for social protection but it also drew attention to population aging issues as many countries faced unsustainable public debts. In many nations, the already-high public spending limits the fiscal possibilities for increased aging-related spending in the long run. Therefore, policy solutions are necessary to ensure fiscal and macroeconomic sustainability as well as the health and well-being of citizens of all ages.

DEMEC is a numerical general equilibrium model (CGE), designed to study long-term relationships between demography, macroeconomic development and public finances. It is particularly suitable for elucidating the long-term sustainability of fiscal policy and was used, among other things, in the Outlook 2017. As in other CGE models, the behavioral relationships that describe consumer and producer behavior are in line with traditional microeconomic theory. The model relates exogenous assumptions about population growth, migration and productivity to the labor supply in different population groups, divided by age, sex, income level, country background and length of residence. Variation in labor force participation and earnings among different population groups can have major impacts on public revenue and expenditure. The model describes the development in two mainland industries (goods and services), three offshore industries and 11 public sectors. The production is used domestically by companies (product input and investments), by public administration (product input, investments and consumption), and by households (private consumption). In addition, enough is exported to finance imports and an exogenous net financial investment abroad (this is mainly linked to the Government's pension fund abroad).

Participants

Head: Erling Holmøy

Participants:

Funder: Ministry of Finance

Publications

(for publications in Norwegian, see here)

Holmøy, E. and B. Strøm (2013): Computable General Equilibrium Assessments of Fiscal Sustainability in Norway in Handbook of Computable General Equilibrium Modeling, Volume 1, 2013, pages 105-158

Stølen, N. M., D. Fredriksen, E. Hernæs and E. Holmøy (2019):The Norwegian NDC Scheme: Balancing Risk Sharing and Redistribution in Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes: Volume 1. Addressing Marginalization, Polarization, and the Labor Market

Fredriksen, D., E. Holmøy, B. Strøm and N. M. Stølen (2019). Fiscal effects of the Norwegian pension reform – A micro–macro assessment, Journal of Pension Economics and Finance, 18(1), 88-123.

Fiscal policy and population ageing (DEMEC)

Publications

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