Why Population Ageing Is Emerging as a Major Tax Challenge for Governments

A new study by the Organisation for Economic Co-operation and Development (OECD) warns that population ageing could reshape how governments collect taxes and finance public services in the decades ahead. While ageing is often associated with rising pension and healthcare costs, the report highlights a less discussed challenge: shrinking tax revenues.

The study, The Impact of Population Ageing on Tax Revenues in OECD Countries, finds that demographic changes are likely to weaken traditional sources of tax revenue, particularly those linked to labour income. For policymakers, the findings provide an important roadmap for adapting tax systems to an ageing world.

Fewer Workers, More Retirees

Across OECD countries, people are living longer and having fewer children. As a result, the share of working-age people is projected to decline while the number of retirees continues to grow.

This shift creates a major fiscal challenge. Governments will need more money to pay for pensions, healthcare and long-term care, but there will be fewer workers contributing taxes and social security payments. According to the OECD, the average share of the working-age population is expected to fall significantly by 2060, reducing the tax base that many countries rely on today.

Why Tax Revenues Are at Risk

The report shows that most tax revenue comes from people in their peak earning years, generally between the ages of 40 and 60. As these groups become a smaller share of the population, revenues from personal income taxes and social security contributions are likely to come under pressure.

Even if older people remain in the workforce for longer, the decline in the number of workers is expected to outweigh the gains. The study's simulations suggest that population ageing alone could reduce the average tax-to-GDP ratio across OECD countries by around one percentage point by 2060.

Countries such as Japan, Korea and several Eastern European economies are expected to face some of the largest revenue losses because they are ageing rapidly and depend heavily on labour taxes.

New Sources of Revenue May Become More Important

The OECD finds that not all tax bases are affected in the same way. Older people generally hold more wealth and receive a larger share of their income from investments, savings and property.

This means taxes on capital income, inheritances, property and wealth could become increasingly important sources of revenue. Consumption taxes such as VAT may also prove more resilient because older households continue spending even after retirement.

For governments, this suggests that future tax systems may need to rely less on labour income and more on broader sources of revenue that reflect changing demographic realities.

What Policymakers Can Learn

One of the report's most important findings is that tax policy design matters. Countries where older people already contribute a significant share of tax revenues appear less vulnerable to ageing than countries that rely mainly on workers.

The study suggests policymakers may need to review tax exemptions and concessions that reduce revenues from pension income, capital gains, inheritances and property. Many of these tax breaks were introduced for valid reasons, but they may limit governments' ability to raise revenue from tax bases that are expected to grow as populations age.

The findings can help governments identify weaknesses in their tax systems early and prepare long-term strategies before demographic pressures become more severe.

Preparing for the Future

The OECD's message is clear: ageing is not only a spending challenge but also a revenue challenge. Governments that fail to adapt may face growing fiscal gaps as the number of retirees rises and the workforce shrinks.

The report does not call for a single solution. Instead, it suggests a combination of reforms, including broader tax bases, more balanced tax mixes, stronger property and inheritance taxation where appropriate, and policies that encourage people to remain in the workforce longer.

For policymakers, the study provides valuable evidence for planning future tax reforms. For citizens, it offers a reminder that demographic change will affect not only pension systems and healthcare services, but also the way governments raise the money needed to fund them. Countries that begin adapting their tax systems today are likely to be better prepared for the fiscal realities of tomorrow.