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Pension Reforms: An Illustrated Basic Analysis

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  • Heikki Oksanen

Abstract

The paper examines pension reforms under population ageing. The concepts of "implicit pension debt", "implicit tax" and "internal rate of return" are first introduced with the help of a three-period model. Using stylised facts, ageing is traced to low fertility and increasing longevity. Formulating a benchmark for intergenerational fairness leads to a framework for designing pension reforms such that leaving an unfair burden to future generations is avoided. Secondly, a yearly simulation model is used to arrive at the following main results for reform blueprints: (1) In a Defined Benefit (DB) system, partial pre-funding is needed to achieve intergenerational fairness unless benefits are sufficiently reduced; partial privatisation is an option for the management of the accumulating funds. (2) Transition from a DB to a Notional Defined Contribution (NDC) system is another reform option; it reduces the replacement rates to levels which match prescribed contribution rates; an NDC public pillar can be accompanied by a second pillar, managed by the private sector. (3) An effective increase in the retirement age is necessary to moderate the increase in pension expenditure and to preserve adequate pension levels. (4) Pension reforms have important effects on public finance target setting. (JEL H1, H5, H6)

Suggested Citation

  • Heikki Oksanen, 2004. "Pension Reforms: An Illustrated Basic Analysis," CESifo Economic Studies, CESifo Group, vol. 50(3), pages 569-625.
    • Handle: RePEc:oup:cesifo:v:50:y:2004:i:3:p:569-625.
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    File URL: http://hdl.handle.net/10.1093/cesifo/50.3.569
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    Citations

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    Cited by:

    1. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2005. "Chapter 4: Pensions and Children," EEAG Report on the European Economy, CESifo, vol. 0, pages 69-101, March.
    2. Altiok, Hasan U. & Jenkins, Glenn P., 2013. "The fiscal burden of the legacy of the civil service pension systems in northern Cyprus," Journal of Pension Economics and Finance, Cambridge University Press, vol. 12(1), pages 92-110, January.
    3. Heikki Oksanen, 2004. "Public Pensions in the national accounts and public finance targets," European Economy - Economic Papers 2008 - 2015 207, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Fabio Pammolli & Pietro Rizza & Nicola Carmine Salerno, 2004. "Regole pensionistiche e incentivi al prolungamento della vita lavorativa: analisi del caso italiano," Working Papers CERM 06-2004, Competitività, Regole, Mercati (CERM).
    5. Heikki Oksanen, 2005. "Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving," CESifo Working Paper Series 1501, CESifo.
    6. Fabio Pammolli & Nicola Carmine Salerno, 2004. "Regole pensionistiche e prolungamento dell'attività: analisi del TIR e effetti del cumulo lavoro-pensione," Working Papers CERM 07-2004, Competitività, Regole, Mercati (CERM).
    7. Roel Beetsma & Heikki Oksanen, 2007. "Pension Systems, Ageing and the Stability and Growth Pact," European Economy - Economic Papers 2008 - 2015 289, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    8. Heikki Oksanen, 2010. "The Chinese pension system - First results on assessing the reform options," European Economy - Economic Papers 2008 - 2015 412, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Michal Slavík, 2006. "The Czech Pension System and the Perspectives of Its Reform," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(3), pages 214-230.
    10. Oksanen, Heikki, 2014. "Public finance sustainability gap and raising the retirement age, abstract and full summary," Research Reports 177, VATT Institute for Economic Research.
    11. Roel Beetsma & Heikki Oksanen, 2008. "Pensions under Ageing Populations and the EU Stability and Growth Pact ," CESifo Economic Studies, CESifo Group, vol. 54(4), pages 563-592, December.
    12. Heikki Oksanen, 2009. "Setting targets for government budgets in the pursuit of intergenerational equity," European Economy - Economic Papers 2008 - 2015 358, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Michal Slavík & Radka Rutarová, 2005. "Příspěvek do diskuse o reformě penzijního systému [Contribution to discussion on reform of pension system]," Politická ekonomie, Prague University of Economics and Business, vol. 2005(3), pages 349-368.
    14. van Sonsbeek, Jan-Maarten, 2010. "Micro simulations on the effects of ageing-related policy measures," Economic Modelling, Elsevier, vol. 27(5), pages 968-979, September.

    More about this item

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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