Arbetsrapport, Institutet för Framtidsstudier - Institute for Futures Studies
Pension Systems and Pension Reform in an Aging Society. An Introduction to the Debate.
Abstract: Traditionally, pension systems aim to fulfill a number of
functions which include income security and consumption smoothing in old
age, as well as income redistribution. The main rationale for pension
reform lies in the interaction between current demographic trends (e.g.
increasing old age dependency ratios) and the design of existing pension
systems (particularly, the so called Pay-As-You-Go public systems). Under
certain conditions, population aging can in fact undermine the ability of a
pension system to fulfill those very aims for which it was created, putting
pensioners at risks of higher poverty and inequality, besides creating
large fiscal pressures on governments and threaten economic growth.
the literature, we find two main approaches to this debate. On the one
hand, economic theory helps us formalize the mechanisms through which aging
affects a pension system, given its possible features (e.g. type of benefit
offered, degree of actuarial fairness or type of financing); it also helps
us quantify costs or returns associated to different pension designs and,
consequently, to different pension reform options. On the other hand, the
policy debate is centered on models of reform which take from concrete
country experiences; overall, it focuses mostly on whether funding pensions
(i.e. privatizing and individualizing retirement savings, away from
Pay-As-You-Go systems) is the best option for reducing many of the negative
economic impacts associated to population aging.
illustrated both sides of the debate – the theoretical and the empirical -
our paper makes two main claims. Firstly, the debate should be re-framed
away from whether funding is the best option for pension reform in the face
of population aging, towards a redefinition of the problem which rather
focus on the type of benefit offered, its coverage, its eligibility
conditions and actuarial design (as this controls important behavioral and
efficiency implications). Secondly, and relatedly, the final impact of a
given pension system or reform on future economic variables (i.e. growth,
poverty, inequality, financial sustainability) cannot be inferred only by
using the tools of economic theory, or the lessons of policy experience.
Rather, it requires the ability to quantify the net effects of several
interacting explanatory levels, such as country-specific demographic,
economic and institutional trends. To this end, we propose the adoption of
micro simulation modeling as a well-suited methodology for shedding more
light on this important policy debate.
Keywords: pension systems; micro simulation modeling; (follow links to similar papers)
JEL-Codes: H50; H55; (follow links to similar papers)
42 pages, May 2007
ISSN: 1652-120X; ISBN: 978-91-85619-06-1
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