Tax Aspects of Policy Towards Aging Populations: Canada and the United States
Alan J. Auerbach
Laurence J. Kotlikoff
This paper uses the Auerbach-Kotlikoff Dynamic Simulation Model to compare
the projected demographic transitions in Canada and the United States. The
simulation model determines the perfect foresight transition path of an economy
in which individuals live to age 75. The model's preferences are life cycle
augmented to include utility from bequests. In addition to handling changes in
demographics and fiscal policies, the model can be run for closed or open
In comparing Canada with the U.S., we first simulate the U.S. demographic
transition, treating the U.S. as a closed economy. The time path of interest
rates obtained from the U.S. simulations are then used in the Canadian
simulations. In the Canada simulations, Canada is assumed to be an open
economy which takes the U.S. interest rate as given.
The simulations indicate that demographics are likely to have significant
effects on rates of saving and taxation in both the U.S. and Canada. However,
the more abrupt demographic transition in Canada combined with the projected
maturation of Canadian social security system leads to a more severe predicted
long term decline in Canadian saving rates. Despite the predicted lower saving
rates, capital deepening is likely to occur in both countries, and the
associated increase in real wages is likely to more than offset projected
higher tax rates, leaVing the growth-adjusted welfare of future generations
higher than that of current generations.
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