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
Date Written: March 1998
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: Suggested Citation