Aging and the Financing of Social Security in Switzerland

Abstract

This paper studies the quantitative impact of aging on the financing of social security and the public sector in Switzerland. Demographic projections forecast a doubling of the dependency ratio until 2050 as well as an increase of 10% in total population due to longer life expectancy. We use a computational growth model with overlapping generations, including labor market adjustment on five different behavioural margins: labor market participation, hours worked, job search, retirement, and on-the-job training. Starting with a passive fiscal strategy, our simulations show that a doubling of the old age dependency ratio might reduce per capita income by more than 20 percent and necessitate a long-run increase of wage taxes and social security contributions by 21 percentage points. A comprehensive reform package, including an increase in the effective retirement age to 68 years and several other measures, may limit the increase of the tax burden to 4 percentage points of the value added tax and reduce the decline of per capita income to 6% in the long-run. firms typically have a high growth potential, need external funds to finance investment, and rely on the key effort and know-how of inside entrepreneurs. Given the limited amount of tangible assets and the non-contractible nature of entrepreneurial effort, these firms are often financially constrained. Access to external funds becomes an important factor in the expansion of innovative industries. This paper models a two sector economy of innovative and standard industries and shows how the pattern of comparative advantage is shaped by factor endowments and variables relating to corporate finance. In particular, a larger equity ratio of young entrepreneurial firms and tough corporate governance standards relax the financing constraints and create a comparative advantage in innovative industries.Aging, social security, retirement, human capital, unemployment