On 30 June 2022, as part of the series of Fiscal Federalism Working Papers, the OECD published a paper entitled Ageing and the long-run fiscal sustainability of health care across levels of government.
In the next 20 years government tax revenue in OECD countries is likely to be negatively affected by population ageing and revenue will grow slightly less than GDP, while health expenditures are likely to increase more than GDP. This issue will mainly affect central governments as revenue for social security funds generally relies on taxes levied on labour income, such as personal income taxes and social security contributions. The revenue of subnational governments (SNGs) relies more on taxes on immovable property and non-tax revenues, which are not directly impacted by population ageing.
In the OECD countries, central governments generally have a more important role in providing healthcare services than SNGs; and will therefore be responsible for most of the additional expenditure required by the need for greater healthcare. There are however some exceptions such as Denmark, Finland, Italy, Spain, Sweden and Switzerland where healthcare is more decentralised.
The tax base will be adversely affected by a decrease in workforce numbers; and tax revenues will also be affected by different consumption patterns such as a higher consumption of health goods and services in older ages. The vulnerability of each country to population ageing will differ depending on the relative importance of various revenue sources.
If subnational governments are subject to fiscal imbalances they can have problems raising the necessary revenue. SNGs often have limited tax autonomy as they depend partly on transfers from central government and usually face borrowing constraints. Measures to manage the effects of an ageing population must target the level of government most likely to be affected by the issue.
Governments could make their tax revenue mix more resilient to population ageing by adopting more growth-friendly taxes to increase output and thereby boost tax revenue collection; or by redesigning taxes to ensure that tax revenues are less affected by population ageing.
The tax revenues from the personal income tax (PIT), social security contributions (SSCs) and payroll taxes are normally most impacted by population ageing because their tax bases are related to labour income. The effects of an ageing population could be partly offset by wage rises resulting from increased demand for certain types of workers. Governments could also increase labour force participation by encouraging more women, elderly and foreign or immigrant workers to join the workforce. Inclusion of pension income in the tax base for PIT and health SSCs could mitigate the decrease in tax revenues resulting from more people entering retirement. Another way to boost tax revenue is to increase productivity which can lead to an increase in wages and tax revenue.
In countries in which consumption is not already highly taxed, VAT/GST rates can be increased to boost resilience to population ageing, as the revenue from these taxes is not affected as much by the issue. The same applies to property taxes which also have fewer adverse effects on economic growth.
Corporate income tax revenues are generally not affected by population ageing; however they are considered to potentially have a negative effect on economic growth. A reliance on corporate income tax to improve resilience to population ageing would therefore involve a balance between these taxes and economic output. The impact in the long term of increasing corporate income taxes is therefore difficult to assess.