In the future, families may be forced to pay more taxes and use public services less, if their finances are unsustainable, or, alternatively, the deficit could become permanent, according to a study promoted by Gulbenkian.
We found that the primary surplus observed today depends on the current age structure of the population. Everything else is constant, projected demographic trends will turn it into large – and permanent – deficits within a few decades, putting budget sustainability under control, “the study reveals,” Public Finance: An Intergenerational Perspective. “
According to this analysis, it will be necessary to increase revenue by 22% to restore sustainability, if there is no change in the ‘budget lifetime profile’.
Thus, the restoration of sustainability depends on changes in “population dynamics” or “changes in the volume of revenues and expenditures.”
The effect of aging on public finances may lead to households having to pay more taxes, receive fewer benefits, enjoy fewer public services, or the deficit may become permanent in the years to come.
Data released today shows that in childhood (0-10 years), later generations were respectively receiving fewer benefits, which are 69,000 euros, given the average person born in 1997, 67,000 euros in 2002 and 62,000 in 2007.
In contrast, in middle age (40-50 years), generations pay more taxes and receive fewer benefits.
By 1957, there were 57,000 euros in benefits and 139,000 taxes, while in 1962 the benefits did not change, but the taxes increased to 141,000 euros.
In 1967, benefits were reduced to 52,000 euros and taxes increased to 142,000 euros.
In the case of retirement (70-80 years) the benefits were greater than taxes.
For those born in 1927, 125,000 euros were charged in benefits and 55,000 euros in taxes, while for those born in 1932 the benefits were 151,000 euros and taxes 51,000 euros.
People born in 1937 received 167,000 euros in compensation and 67,000 euros in taxes.
The projected population dynamics in Portugal between 2018 and 2100, in turn, anticipate a “clear change” in the structure, with the largest concentration of individuals between the ages of 35 and 60 passing through, at the end of the century, 60 and 85 years.
Regarding the implications of demographic changes in public finances, the study indicated that the total revenues in 2017 “were sufficient to equalize the total spending and generate a small primary surplus” (1300 million euros).
However, the projected demographic change “indicates that the primary surplus related to the age structure will face a deficit around 2030”.
Redemption of the initial balance will only be possible with a decrease in the population and a change in the proportion of adults.
The current age picture of expenditures and incomes indicates that projected demographic trends will reduce the current primary surplus, reaching large deficits within a few decades. He stressed that this deficit will be permanent given the trend of declining fertility and increasing life expectancy.
The study also included an analysis of alternative scenarios, which concluded that economic growth, increased immigration, or reduced pensions cannot guarantee sustainability, without generating inequality between generations.
In the case of immigration policies, in the medium term, the number of working-age residents who contribute more taxes may increase, but, later on, they will end up aging and the amount of benefits increases.
“We see immigration as a margin that is difficult to control: if people have access to better opportunities abroad, they are free to leave. He noted that immigration, on the contrary, can form a relevant margin.
Lowering pensions or increasing the retirement age implies lower transfers to retirees, but can lead to generational disparities, if there is no reduction in contributions.
Economic growth, in turn, is indicated as inconsistent with the age profile of benefits and taxes.
The study, promoted by Gulbenkian with a review by Ricardo Reis of the London School of Economics, includes analyzes by Francesco Franco (Nova SBE), Tiago Bernardino (Nova SBE and IPP) and Luís Teles Morais (Nova SBE and IPP).
For this analysis, scenarios were considered, for example, economic growth, immigration, lower pensions, life expectancy, as well as birth and fertility rates.
This study, which is based on the “generational accounting” methodology, includes data from Eurostat, the European Commission, AMICO and other institutions.
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