During the coming 40 years, the increasing share of pensioners in the Nordic populations is likely to lead to a large increase in public pension spending as a share of GDP. This increase will tend to make the public finances in the Nordic countries even more sensitive to cyclical changes than they are at present. This study points to two important factors when considering the effects of public pension systems on the cyclical sensitivity of public finances. Firstly, high public spending on pensions willlead to higher cyclical sensitivity of public finances. Secondly, a fully-funded pension scheme will affect the cyclical sensitivity of public finances less than a pay-as-you-go system.
Altogether, the results indicate that the cyclical sensitivity of public finances will be significantly affected by the aging in the Nordic populations. In our baseline specification, the cyclical sensitivity increases between 5 and 15 percent, compared to the cyclical sensitivity in the late 1990s, between 2000 and 2040.
