The share of people in working age is predicted to fall significantly in most OECD countries during the coming 30 to 40 years. Both falling birth rates and increased longevity contribute to this demographic change. The overall objective of the project is to analyse how this population aging affects the incentives to save and work, and to examine the consequences for public finances. The project consists of two separate but related parts. The first part will examine the demographic effects on macroeconomic variables such as savings, labour supply, and factor prices, and how these effects depend on economic policy (for example the pension system or the size of the public sector). We have to main hypotheses. First, public finances are more affected by reduced nativity than by increased longevity. Second, population aging is more problematic if the public sector is large or if the pension system distorts incentives to work and save.

The second part of the project will examine the consequences of population aging on public savings. Population aging implies that fewer young will have to support more old people, and that the relative size of the tax base shrinks. All this will put pressure on future public finances. Future tax rates can be held down if taxes are raised before the baby-boom generation retires, and this is the policy implied by optimal taxation arguments. Studies of the American economy, however, have shown that the trade-off between saving today and high taxes tomorrow is relatively unimportant. But the results of these studies cannot be directly applied on the typical European country where the public sector is more comprehensive.