The Impact of Demographic Change on Social Security Financing

Abstract

The relationship between prospective demographic changes and social security tax rates over the long term is examined for four countries--the Federal Republic of Germany, Japan, the United Kingdom, and the United States. Through use of a simple projection model it is shown that, without significant reform, social security programs as constituted in 1980 would have implied substantial increases in social security tax rates by the year 2025 in all four countries. The model is then used to explore how a range of policy options would affect the evolution of tax rates. Recent policy measures taken in each of the countries can be summarized in terms of the model, and it is shown that these measures lead to markedly lower tax rates than with unreformed programs, although the tax rate in Germany will remain high.