Population Aging, Public Finances, and Alternatives for Retirement Reform

ABSTRACT

We study retirement reforms that ensure sustainable public finances in the face of population aging. We build a structural life-cycle model with a pension scheme that includes a public pay-as-you-go pillar and a mandatory fully-funded pillar. The two pillars interact through a means-testing mechanism. The higher the fully-funded benefit, the lower the public pay-as-you-go benefit. The interaction allows us to assess a reform in which increases in fully-funded contributions and benefits reduce public pension benefits through means testing. We compare this reform to three alternatives: Increasing the retirement age, cutting public benefits, and increasing taxes to finance growing public pension expenditures. We estimate the model to Danish micro data and find that expanding fully-funded pensions to indirectly lower public pensions yields the highest long run welfare. Among the remaining reforms, we show that directly lowering public benefits outperforms hiking taxes and increasing the retirement age in the long run. (For the first time, I am going to present the results of the transitional costs of the four reforms.)

REGISTRATION

If you have any questions regarding the seminar, please contact the seminar organizer Camilla Nesfossen Hopsdal.