Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: In developed countries, pension systems emerged as a political response to socio-econo-mic changes brought about by industrialisation and urbanisation in the late 19th and early 20th centuries. Today, new socio-economic changes create both rationales and poli-ti-cal forces for revisions of existing pension systems. Changes in demo-gra-phy, real wage growth and real interest rates are perhaps the most obvious exam-ples. Increased instability of the family, more heterogeneity among individuals, greater international mobility of labour and capital, and ambitions to encourage individual responsibility also have important implications for pension systems. When discussing these issues, it is useful to set up a more elaborate classification of pension systems than the usual distinction between defined-benefit (DB) and defined-contribution (DC) systems. The choice of an appropriate taxonomy depends, of course, on the issues to be raised. One question that is focused on in this paper concerns the consequences of socio-economic shocks on the distribution of income and the sharing of income risk among generations. It turns out that the distinction between pension systems with exogenous and endogenous contribution rates (tax rates) then becomes crucial. But the paper also deals with socio-economic changes that are induced by the pension system itself via behavioural adjustments of individuals – and the feedback of these changes on the pension system. When dealing with such adjust-ments, highly relevant features of pension systems are the degree to which they are actuarial and funded, respectively – two aspects that are related but not the identical.

Keywords: social security; pensions; social security reform

JEL-codes: H53; H55

34 pages, May 1, 2000

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