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

collapse under the stresses imposed by population ageing, and ends by proposing
privatization of these systems, for example by moving to fully-funded pension
schemes, as a solution to these problems. Population ageing caused by declining
fertility should be accompanied by a reallocation of resources from the household to
the market sector, which would expand the flow of real output and the tax base
available to meet the changed pattern of demand for goods and services arising out
of the demographic changes. However, up until now, the effect of family tax and
safety net systems has been to place such heavy incremental burdens on working
women as second earners, that this necessary resource allocation has not taken place.
Thus the threat of crisis is policy driven, and can be eliminated by making the
appropriate changes in tax and family support policies.³⁵

The case for privatising pension systems and health insurance markets, when
considered on its own merits, is widely rejected in the literature. Funding cannot
make anyone better off without making others worse off, contrary to the impression
that its advocates seek to give. Indeed, because of the higher administrative and
transactions costs associated with it, it has the potential to make everyone worse off,
though obviously it can be structured in such a way that some gain at the greater
expense of others. Experience suggests that the pattern of gains and losses would be
regressive. Health insurance markets notoriously suffer from problems of market
failure associated with information asymmetries. These also present problems to the
design of public systems, but repeating the mantra of privatization does not represent
an effective approach to solution of these problems.

References

ABS (2005), “Survey of Income and Housing - Confidentialised File”, Technical Paper
2003-04 (revise).

Apps, PF and R Rees, (2005), “Gender, Time Use, and Public Policy Over the Life
Cycle, Oxford Review of Economic Policy, 21, 439-461.

Apps, P.F., and R. Rees, (2003), Life Cycle Time Allocation and Saving in an Imperfect
Capital Market, NBER Summer Institute Session on: Aggregate Implications of
Microeconomic Consumption Behavior, Boston, July 21-25.

³⁵ Such policies would obviously need to include the development of a high quality and affordable
childcare system to be effective.

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