Aging, Taxes and Pensions in Switzerland

The gains in life expectancy are expected to double the dependency ratio and increase population by 10% in Switzerland until 2050. To quantify the effects on pensions, taxes and social contributions, we use an overlapping generations model with five margins of labor supply: labor market participation, hours worked, job search, retirement, and on-the-job training. A passive fiscal strategy which merely adjusts labor taxes and contribution rates to balance budgets, would be very costly. Total labor taxes would rise by 21 percentage points and per capita income would fall by roughly 20%. A comprehensive reform, including an increase in the effective retirement age to 68 years, may limit the tax increases to 4 percentage points of value added tax and reduce the decline of per capita income to less than 6%. The present rules of deferred taxation of pension income support social security and labor market reform
by shifting tax revenue to the future when it is needed most in an aging society.