Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-05T22:24:19.807Z Has data issue: false hasContentIssue false
  • English
  • Français

Pension reform in a worst case scenario: public finance versus political feasibility*

Published online by Cambridge University Press:  13 January 2016

MURIEL BOUCHET ,
LUCA MARCHIORI  and
OLIVIER PIERRARD
MURIEL BOUCHET
Affiliation:
IDEA foundation (e-mail: [email protected])
LUCA MARCHIORI
Affiliation:
Central Bank of Luxembourg (e-mail: [email protected])
OLIVIER PIERRARD
Affiliation:
Central Bank of Luxembourg (e-mail: [email protected])
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper uses a quantitative overlapping generation model to suggest a pension reform able to sustain a retirement system, in the face of deep demographic changes. We derive the reform design from an optimization program that selects one or more policy instruments – and their values – among a predefined set, to minimize the welfare loss of the median voter while keeping sound public finances, sustaining gross domestic product growth and considering the welfare of the newborn generation. We calibrate the model to the Luxembourg economy. The European Commission (2012) forecasts that, among all euro area countries, Luxembourg will experience the largest increase in pension costs between now and 2060. Our simulations show that a single instrument reform would imply severe backlashes on the rest of the economy. The suggested pension reform instead consists of a policy mix including taxation, benefits and the effective retirement age. We stress the need to design pension reforms based on optimization programs that lead to the achievement of desired targets. Indeed, the reform implemented by the Luxembourg government in 2013, which does not result from an optimization program, will not keep public finances sound over the medium term.

Keywords

D58H55J11J26Pension reformageingLuxembourgdynamic general equilibrium modeloverlapping generations
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 2 , April 2017 , pp. 173 - 204
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

This paper should not be reported as representing the views of the Central Bank of Luxembourg or the Eurosystem. The views expressed are those of the authors and may not be shared by other research staff or policymakers in the Central Bank of Luxembourg or the Eurosystem. This paper was written while Muriel Bouchet was working at the Central Bank of Luxembourg. We thank Konstantinos Efstathiou and John Verrinder for their careful reading of the final version of the paper.

References

Attanasio, O., Kitao, S., and Violante, G. L. (2007) Global demographic trends and social security reform. Journal of Monetary Economics, 54(1): 144–198.Google Scholar
Auerbach, A. and Kotlikoff, L. (1987) Dynamic Fiscal Policy. Cambridge: Cambridge University Press.Google Scholar
Börsch-Supan, A. and Ludwig, A. (2013) Modeling the effects of structural reforms and reform backlashes: the cases of pension and labor market reforms. Economic Modelling, 35: 999–1007.Google Scholar
Börsch-Supan, A., Ludwig, A., and Winter, J. (2006) Ageing, pension reform and capital flows: a multi-country simulation model. Economica, 73: 625–658.Google Scholar
Bouchet, M., Marchiori, L., and Pierrard, O. (2014) Déficit, croissance et bien-être intergénérationnel: comment réformer les pensions au Luxembourg? BCL Working Paper 87, Banque centrale du Luxembourg.Google Scholar
Bütler, M. (2000) The political feasibility of pension reform options: the case of Switzerland. Journal of Public Economics, 75: 389–416.Google Scholar
de la Croix, D., Pierrard, O., and Sneessens, H. (2013) Aging and pensions in general equilibrium: labour market imperfections matter. Journal of Economic Dynamics and Control, 37(1): 104–124.Google Scholar
De Nardi, M., Imrohoroglu, S., and Sargent, T. J. (1999) Projected U.S. demographics and social security. Review of Economic Dynamics, 2(3): 575–615.Google Scholar
Diaz-Gimenez, J. and Diaz-Saavedra, J. (2009) Delaying retirement in spain. Review of Economic Dynamics, 12(1): 147–167.Google Scholar
Duval, R. (2003) The retirement effects of old-age pension and early retirement schemes in OECD countries. OECD Economics Department Working Papers, No. 370, OECD Publishing.Google Scholar
European Commission (2012) The 2012 Ageing Report: economic and budgetary projections for the EU-27 Member States (2010–2060). Joint Report prepared by the European Commission (DG ECFIN) and the Economic Policy Committee (Ageing Working Group).Google Scholar
Fehr, H., Kallweit, M., and Kindermann, F. (2013) Should pensions be progressive? European Economic Review, 63: 94–116.CrossRefGoogle Scholar
Gavilán, A., de Cos, P. H., Jimeno, J. F., and Rojas, J. A. (2011) Fiscal policy, structural reforms and external imbalances: a quantitative evaluation for Spain. Working Paper n.1107, Bank of Spain.Google Scholar
Henin, P. Y. and Weisenblum, T. (2005) Welfare effects of alternative pension reforms: assessing the transition costs for French socio-occupational groups. Journal of Pension Economics and Finance, 4(3): 249–271.Google Scholar
Jaag, C., Keuschnigg, C., and Keuschnigg, M. (2010) Pension reform, retirement, and life-cycle unemployment. International Tax and Public Finance, 17(5): 556–585.Google Scholar
Lünnemann, P. and Wintr, L. (2009) Wages are flexible, aren't they? Evidence from monthly micro wage data. BCL Working Paper 39.Google Scholar
Magnani, R. (2011) A general equilibrium evaluation of the sustainability of the new pension reforms in Italy. Research in Economics, 65: 5–35.Google Scholar
Marchiori, L. and Pierrard, O. (2012) LOLA 2.0: Luxembourg OverLapping generation model for policy analysis. BCL Working Paper 76.Google Scholar
Marchiori, L., Pierrard, O., and Sneessens, H. (2011) Demography, capital flows and unemployment. IZA Working Paper 6094.CrossRefGoogle Scholar
Obstfeld, M. and Rogoff, K. (1995) Exchange rate dynamics redux. Journal of Political Economy, 103: 624–660.Google Scholar
OECD (2014) OECD Pensions Outlook 2014. Paris: Organization for Economic Co-operation and Development.Google Scholar
Okamoto, A. (2013) Welfare analysis of pension reforms in an aging Japan. The Japanese Economic Review, 64(4): 452–483.Google Scholar
Pissarides, C. (2000). Equilibrium Unemployment Theory. Cambridge, MA: MIT Press.Google Scholar
STATEC (2010) Projections socio-économiques 2010–2060. Bulletin du STATEC n.5-2010.Google Scholar
United Nations (2013) World Population Prospects: The 2012 Revision. United Nations: Department of Economic and Social Affairs.Google Scholar