Population aging, social security and fiscal limits

The Future of Multi-Pillar Pensions

This chapter examines the economic and demographic factors that threaten the viability of European pension systems over the next 50 years. In the short to medium term, the principal challenge is indeed a structural rebalancing of public finances, by applying austerity measures and reducing reliance on debt-financing, while at the same time promoting jobs growth and minimizing adverse impacts on vulnerable population groups. In the longer term, population aging remains the key challenge, although its magnitude, speed and timing vary across the European countries under review. Longevity gains and falling fertility levels, especially in Central and Eastern European countries where emigration is another contributing factor, imply that the cohorts of elderly are growing in number just as the cohorts of working population supporting them are starting to decline. The implications on the size and shape of public services and finances as well as on future growth and on living standards are considerable. This chapter argues that a review of fundamentals is required, for all concerned-individual countries as well as EU institutions-in moving forward, by examining whether, and how, recent policy reforms compromise the pension income adequacy of future retirees, and what policies can improve the prospects for both the financial and social sustainability of public pension systems.

2004

The paper investigates long-term sustainability of public finances under population ageing and presents a method to transform long-term public expenditure projections into medium-term budget balance and debt targets. Firstly, a framework based on the current national accounting concepts is presented, and data on EU-12 (euro area) are used as illustrations. Secondly, it is shown how the proposed rules for actuarial accounting of pension liabilities can be consistently implemented to public pensions. This leads to an extended framework for setting public finance targets. Government deficit and debt shift to new orders of magnitude, which might make implementation problematic. However, extending actuarial accounting to government as an employer already significantly shifts these figures.

Journal of Public Economic Theory, 2002

This note shows that a public pension system with a fairly general individual tax–benefit linkage is (computationally) equivalent to a system without linkages. The “equivalent” pension system without linkages not only facilitates simulations of policy experiments but also offers some insight into the implied tax structure of the tax–benefit linkage. It is shown that implicit tax rates may differ considerably across age groups even if the statutory tax rate is constant over the life-cycle.

Oxford Economic Papers, 1997

In this paper decision making on public pensions is modeled within the framework of the well-known two-overlapping-generations general-equilibrium model with rational expectations. The model is used to analyze the eects of aging on the evolution of public pension schemes. Analytical results are derived for the long run as well as for the short run by the met h o d o f c o m parative s t a tics and comparative dynamics respectively. This shows that the short-run consequences of a g ing depend crucially on the existing size of the PAYG-scheme. JEL Code: H55

2011

This chapter examines the economic and demographic factors that threaten the viability of European pension systems over the next 50 years. In the short to medium term, the principal challenge is indeed a structural rebalancing of public finances, by applying austerity measures and reducing reliance on debt-financing, while at the same time promoting jobs growth and minimizing adverse impacts on vulnerable population groups. In the longer term, population aging remains the key challenge, although its magnitude, speed and timing vary across the European countries under review. Longevity gains and falling fertility levels, especially in Central and Eastern European countries where emigration is another contributing factor, imply that the cohorts of elderly are growing in number just as the cohorts of working population supporting them are starting to decline. The implications on the size and shape of public services and finances as well as on future growth and on living standards are considerable. This chapter argues that a review of fundamentals is required, for all concerned-individual countries as well as EU institutions-in moving forward, by examining whether, and how, recent policy reforms compromise the pension income adequacy of future retirees, and what policies can improve the prospects for both the financial and social sustainability of public pension systems.

Journal of Political Economy, 2002

Journal of Pension Economics & Finance, 2022

Demographic change forces governments in all OECD countries to reform the public pension system. Increased sensitivity to rising inequality in society has made the challenge for policy makers only greater. In this paper we evaluate alternative reform scenarios. We employ an overlapping generations model for an open economy with endogenous hours worked, human and physical capital, output, and welfare. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Frequently adopted reforms in many countries such as an increase of the normal retirement age or a reduction in the pension benefit replacement rate can guarantee the financial sustainability of the system, but they fail when the objective is also to improve macroeconomic performance and aggregate welfare without raising intergenerational or intragenerational welfare inequality. Our results prefer a reform which combines an increase of the retirement age with an intelligent design of the linkage between the pension benefit and earlier labour earnings. First, this design conditions pension benefits on past individual labour income, with a high weight on labour income earned when older and a low weight on labour income earned when young. Second, to avoid rising welfare inequality this linkage is complemented by a strong rise in the benefit replacement rate for low ability individuals (and a reduction for high ability individuals).

Informatica (slovenia) - INFORMATICASI, 2008

The combination of low fertility, decreasing mortality and the baby-boom generation entering retirement will dramatically increase the share of elderly people in Slovenia in future decades. Without further changes in the pension system this will bring about strong pressure on the public pension system. In the analysis we use a cohort-based model to project the share of public expenditure on pensions in gross domestic product. This model enables us to analyse the long-term effects of the forthcoming demographic changes in connection with the current public pension system. The projected rise in pension expenditure will have to be mitigated at some point in the future and reducing pension benefits is one of the options.

LSE Research Online Documents on Economics, 2015

The Government has recently issued a consultation document which raises the possibility of a substantial change in the taxation of pensions. In this paper we assess the economic consequences of changing from the existing EET system (where pension savings and returns are exempt from income tax, but pension income is taxed) to a TEE system (pension savings would be from taxed income but with no further taxation thereafter), making use of two complementary approaches. First, we review the economic and empirical literature, and second we construct a general equilibrium overlapping generations (OLG) model parameterised to UK data and the UK tax system. Both approaches lead to the same outcome: that changing from EET to TEE would lead to a fall in personal savings. In addition, our analysis shows that the move would be counter to a series of pension reform principles the Government has set out. Our review of published literature shows most authors find EET (which is used in 22 of 30 OECD ...

2007

We study the effects of demographic shocks and changes in the pension system on the macroeconomic performance of an advanced small open economy. An overlapping-generations model is constructed which includes a realistic description of the mortality process. Individual agents choose their optimal retirement age, taking into account the time- and age profiles of wages, taxes, and the public pension system.

2010

this Brief examines the financial sustainability of public finances in Eu states, and takes a forward glimpse at the likely evolution of pension incomes in Eu countries, using projections made available by the European Commission during 2009. it also examines how the pension reform responses at national level to the challenges of financial sustainability have influenced the reshaping of pension systems in Eu countries, producing a variety of pension systems that are less redistributive in some cases and more socially protective in others. these impact-of-pension-reforms results are derived from the simulations of pension income entitlements for future retirees, undertaken by oECD in 2009.

European Economy Economic Papers, 2007

This paper explores how the Stability and Growth Pact may cope with the future costs of population ageing in the European Union. Clearly, population ageing has forced countries to reform their pension systems, and will continue to do so, both by reducing the generosity of pension arrangements and by switching to funding rather than relying on pure pay-as-you go pension provision. We study how such reforms affect the room for adhering to the Pact, but also how the Pact may induce or hamper the incentives for reform. In our analysis we will draw on recent literature on the Pact and on the pensions and the ageing problem. We will also calibrate a simple model for addressing intergenerational equity.

Macroeconomics eJournal, 2007

This paper explores how the Stability and Growth Pact may cope with the future costs of population ageing in the European Union. Clearly, population ageing has forced countries to reform their pension systems, and will continue to do so, both by reducing the generosity of pension arrangements and by switching to funding rather than relying on pure pay-as-you go pension provision. We study how such reforms affect the room for adhering to the Pact, but also how the Pact may induce or hamper the incentives for reform. In our analysis we will draw on recent literature on the Pact and on the pensions and the ageing problem. We will also calibrate a simple model for addressing intergenerational equity.

OECD Economics Department working papers, 1998