By Juan Medina, Michael Pedersen & gerardo reyes

Emerging economies face long-run fiscal sustainability challenges associated with demographic change and the productive capacity of commodity sectors. Population aging can weaken labor supply growth, constrain tax bases, and increase age-related public expenditures, while declining productivity in non-renewable sectors may further limit fiscal capacity and economic growth. This paper develops a semi-structural macro-fiscal model to analyze the long-term implications of population aging for economic growth, fiscal sustainability, and public debt dynamics in resource-rich economies. The model integrates demographics, labor markets, sectoral production, fiscal revenues, age-related public expenditures, and government debt within a unified deterministic and stochastic simulation framework. It is applied to Chile, given the speed of its demographic transition, the importance of consumption taxation, and the central role of mining in macroeconomic and fiscal performance. The results indicate that demographic aging generates persistent fiscal pressures through both expenditure and revenue channels. Rising pension and health spending increase primary expenditures as a share of GDP, while slower labor force growth constrains output growth and tax bases. Under current policy settings, these forces lead to a gradual but sustained increase in public debt over the long run. Stochastic simulations show substantial dispersion in debt trajectories due to uncertainty surrounding age-related expenditures. Policy simulations suggest that higher labor force participation mainly improves fiscal sustainability through stronger revenues, while increases in statutory retirement ages affect both revenues and pension expenditures, generating larger fiscal improvements. Nevertheless, these reforms mitigate but do not fully offset the long-run fiscal consequences of demographic change.

Source SSRN