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a blog from young economists at Nova SBE

Demographic Change – Who Pays For The Retired Population?

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In the past decades, most developed economies have experienced dramatic decreases in birth rates. They are all confronted with similar challenges in demographic change – a continuously aging population. Since this development in common in most EU member states, various countries have been introducing policy reforms in order to encourage fertility. The main objective of these reforms is to tackle the prevailing imbalance between the working population vis-à-vis the growing number of pensioners, and thus avoiding shortages in financing pension payments.

In most of the developed countries, the decrease in birth rates is accompanied by a remarkable increase in the female labour force participation. Since then, this relationship has been a frequent target of research. A positive impact of active public policy in facilitating child-rearing has been observed by for example Haan and Wrohlich (2010). They examine the effects of tax and transfer systems, including child care costs on female employment and fertility. They find that increasing child care subsidies both increase female labour force participation and fertility rates of highly educated women. Azmat and Gonzales (2010) investigate the effectiveness on fertility as well as female employment of Spanish policy reforms in 2003. Reforms considered here are concerning the income tax, namely higher tax deductions for households with children as well as an increase in child benefits.

In the case of Germany, recent reforms in parental allowance and parental leave have been introduced in 2007. They are funded by the federal tax system and are designed to reconcile work and child-rearing. It is an income subsidy paid to the parent that is dedicated to caring for the newborn child. It is limited to the first 12 to 14 months after the child’s birth and based on the income after taxes earned by the parent. This period is the overall duration that can be taken as parental leave and it can be shared by both parents, thus, allowing for more flexibility. A first evaluation of the reform by the German Federal Statistical Office reveals that the reforms actually encouraged fathers to claim parental allowance, on average receiving higher payments. Moreover, the majority of the parents were employed before the birth of their children. Thus, preliminary results seem to be in line with the government’s objective to increase labour force participation of women – a policy goal that constitutes one part of the major goal in alleviating the consequences of the demographic change.

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Author: studentnovasbe

Master student in Nova Sbe

One thought on “Demographic Change – Who Pays For The Retired Population?

  1. Yes! Finally someone writes about retsinas.