EUROPE – A new academic study published by the European Commission envisages higher taxes as a solution to the problem of population ageing.

“The underlying economic reasoning is that establishing, for each successive age cohort, a link between tax contributions and ageing-related public expenditure benefits can be argued as introducing a sound economic principle,” says Heikki Oksanen of the European Commission’s Directorate General for Economic and Financial Affairs.

Oksanen says it is “an undeniable fact” that there is a roughly 30-year gap in earnings-related pension systems between the accrual of pension rights and their use – and longevity increases within those 30 years. Also, the number of people in the younger cohorts declines due to lower fertility.

“Given the expenditure projections, these demographic factors underpin a new rule determining a gradually increasing tax rate so that intergenerational fairness is fulfilled, at least approximately,” Oksanen says in a 29-page paper published by the Commission called ““Population ageing and public finance targets”. The paper does not necessarily reflect the views of the Commission itself.

“As for policy options stemming from the present framework, an increase in the tax rate could always be replaced by a decline in non-ageing-related expenditure,” Oksanen says.

The study does not tackle the “institutional question” about which level of government should set tax rate targets, noting that under EU rules the responsibility for sound public is shared between member states and the council of finance ministers.

“The considerations of long-term sustainability of public finances have recently gained importance,” the study says, adding that its method could “provide additional input” to the debate.

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