ABSTRACT
Population ageing is a major topic in the policy debate. Projections by the United Nations show that for the OECD area as a whole the share of the elderly (people at age 65 or above) will increase from 15 per cent in 1990 to 22 per cent in 2040. At the same time, the old-age dependency ratio (the ratio of the elderly to the working-age population) is expected to rise from 20 per cent to 37 per cent. For developing countries, a similar change is expected at a later stage (United Nations 1994). Rising dependency ratios imply a decline in the size of the tax base. At the same time, the rising share of the elderly increases the outlays for health care and social security. In OECD countries, social security is largely on a pay-as-you-go (PAYG) basis, that is, the currently active population pays for the pensions of the retired population. Without a substantial cut in public expenditure programmes and transfers, the ageing process will cause a substantial increase in the net tax burden for younger generations.
