On 30 August 2022 the OECD published a Fiscal Federalism paper dealing with the effect of population ageing on tax revenue across all levels of government. The study is part of a larger project examining the fiscal challenges of population ageing. Earlier this year a paper was published by the OECD looking at problems arising for healthcare spending as a result of the ageing population.

OECD countries will have problems funding their health systems in the future as population ageing increases the demand for health services while at the same time reducing the size of the workforce. This development will increase the need for government spending on health while potentially reducing the tax and social security contributions (SSCs) collected from the wages of the working population. The majority of funding for health and old age care services is dependent on the revenues from taxes on labour.

The OECD study aims to quantify the effect of population ageing on tax revenues, looking at the different levels of government. In most OECD countries, spending on healthcare and old-age care is shared between central and subnational levels of government. The funding problems resulting from population ageing can vary depending on the level of government and reforms may be required at a particular level of government or in relations between levels of government with respect to funding.

The research was carried out by looking at the effects on revenue of economic growth and of population ageing. In the case of economic growth, the effect on revenues was found by looking at the long-term buoyancy of revenues, the extent to which government revenues respond to GDP growth. The effect of population ageing on revenues was examined by looking at the estimated changes in the tax base for labour income, asset income and consumption.

The study found that in relation to long-run buoyancy the median increase in tax revenues would be generally in line with GDP growth, except for corporate income tax which was estimated to grow at a rate 11% more than GDP growth.

In more than half the OECD countries, changes in the population structure with regard to ageing will be offset by population growth. In a number of other countries, the population is projected to decrease and this, combined with the changes in population structure, would lead to a decrease in revenues. In just four of the OECD countries, government revenues could increase as a result of population increases combined with changes in population structure.

In countries where the population is expected to grow, there will tend to be less impact resulting from changes in the population structure, because part of the population growth will be in people of working age, thereby increasing revenue from tax and SSCs.

The revenues from the personal income tax, payroll taxes and SSCs are projected to decrease by 9% in per capita terms as a result of the effect of population ageing on wages. The tax revenues from asset income are projected to increase by around 7% in per capita terms through population ageing because older people generally have more asset income than younger people. The study suggests that private consumption, which is the tax base for taxes on goods and services, stays around the same after the beginning of adulthood and GST/VAT revenues will remain around the same in per capita terms despite the ageing populations.

As governments depend on personal income tax, SSCs and payroll taxes more than on asset income for their tax revenue, there is likely to be a fall in tax revenue of up to 8% in per capital terms due to population ageing. Revenues are expected to fall in all but four OECD countries.