Population ageing, taxation, pensions and health costs, CHERE Working Paper 2007/10

These results suggest that household decisions concerning labour supply, household
saving and private heath insurance cover, and spending on health overall, are made
simultaneously, and in response to net of tax wage rates as well as interest rates and
insurance premiums. Tax policies that create strong disincentives for female labour
supply can therefore be expected to have strong negative effects on saving and private
health spending. The same policies also contract the tax base, by reducing female
labour supply. A reduced tax base will make the higher level of tax revenues required
for funding family support, pensions and health less sustainable, while also limiting
the ability of families to fund health costs privately.

In the light of this evidence, it is something of a contradiction for government to
provide, on the one hand, tax subsidies to encourage saving for retirement and the
purchase of private health insurance and, on the other, to put in place a family tax and
support system that sharply reduces both, by inhibiting female labour supply. The
policies, when examined jointly, can be seen to make very little sense as a response to
a rising ADR.

Moreover, as stand alone policies, tax subsidies for superannuation and private health
insurance are open to objections that are well established in the economics literature.
In the first instance, it has been known since Samuelson's (1958) classic paper on
overlapping generations economies that switching from a PAYG to a funded pension
system cannot, per se, lead to an efficiency gain. There is now a large body of
research that draws on the Samuelson model to show that the switch to a fully funded
scheme cannot be a solution to the problems raised by declining fertility and
increasing ADRs.³² A key effect of the policy change is to require the present
working generation to pay twice - they must save for their own retirement while
continuing to pay taxes that finance the pensions of the currently retired. This double
burden is especially problematic for working married women who are already
contributing disproportionately to government revenues under the present tax system.

The approach also fails to address the problem of insurance cover for longevity risk,

³² The studies include Breyer (1989), Geanakoplos, Mitchell and Zeldes (1998), Chand and Jaeger
(1996) and Orszag and Stiglitz (1999) among others. For a discussion in the Australian context, see
Apps and Rees (2002).

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