Aging and Pension Reform in a Small Open Economy: The Role of Savings Incentives

CentER Working Paper No. 1998-90

19 Pages Posted: 6 Oct 2000

See all articles by Theo Leers

Theo Leers

Tilburg University - Department of Economics

A. C. Meijdam

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Harrie A. A. Verbon

Tilburg University - CentER; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 1998

Abstract

In this paper we analyze the effects of aging in a small open economy with a representative government that is accountable only to current generations. More specific, we address the question whether in case of ageing a transition from an unfunded to a more funded pension scheme is politically feasible. We show that the existence of a suitable subsidy on savings is crucial in this respect. Without a subsidy on savings, the economy is trapped at the pre-existing level of savings and aging can only be cushioned by an increase of the PAYG tax. However, if a subsidy exists which is linked to the tax rate in a non-linear way a partial conversion from PAYG to funded pensions is politically feasible. Such a conversion requires, however, an excercize in fine tuning and is thus not a straightforward matter.

JEL Classification: J14, H55

Suggested Citation

Leers, Theo and Meijdam, A.C. (Lex) and Verbon, Harrie A. A., Aging and Pension Reform in a Small Open Economy: The Role of Savings Incentives (March 1998). CentER Working Paper No. 1998-90, Available at SSRN: https://ssrn.com/abstract=166483 or http://dx.doi.org/10.2139/ssrn.166483

Theo Leers (Contact Author)

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

A.C. (Lex) Meijdam

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 23 85 (Phone)
+31 13 466 30 42 (Fax)

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Harrie A. A. Verbon

Tilburg University - CentER ( email )

Department of Economics
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 466 28 78 (Phone)
+31 13 466 30 42 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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