On the role of budgetary policy during demographic changes.

"The paper investigates the relationship between old age income maintenance and budgetary policy when a growing proportion of the population is retired. Special attention is paid to the different kinds of adjustment required under pay-as-you-go (PAYG) and fully-funded (FF) pension schemes. The paper shows that FF schemes reach spontaneously a new equilibrium while PAYG systems need policy action. With reference to PAYG systems, the paper shows that the tax increase called for by most governments is appropriate in the short-run, when the dependency ratio plays a dominant role. In the long-run, however, the increase in the tax rate is smaller, as the effects of the changes in the dependency ratio is offset by the lower need of public savings required for financing capital accumulation." The geographical focus is on developed countries.