Pension Reform, Economic Growth and Financial Development - An Empirical Study

Pension reform is one of the biggest challenges facing national governments. How to reform the old pay-as-you-go (PAYG) systems is still under hot debate; one of the most influential funded pension schemes is designed by the World Bank. In the second chapter of this paper, we first review the arguments for and against the PAYG and then critically discuss the World Bank model by drawing on related literature. The third chapter of this paper presents our empirical results. Regarding the link between economic growth and pension reform towards World Bank model, our panel estimation suggests a negative relationship in the short run and positive relationship in the long run, although the results for OECD countries are not very statistically robust.The second empirical work is focused on pension fund assets and economic growth. A positive link between these two variables is found by our standard economic growth specifications; in addition, there is evidence that pensions are a good predictor of economic growth. This result is then consolidated by our Panel Granger causality test. The last empirical work deals with the relationship between pension assets and financial development. On balance, our Panel correction model and Panel Granger causality test suggest that pension funds growth leads financial development, although some sub-group estimations are not strong. In addition, there is evidence that traditional banking industry is declining relative to other financial institutions, but not,even increasing relative to the economy.