A Tradeoff between the Output and Current Account Effects of Pension Reform
International Monetary Fund, Dec 3, 2012 - Business & Economics - 24 pages
We compare the long-term output and current account effects of pension reforms that increase the retirement age with those of reforms that cut pension benefits, conditional on reforms achieving similar fiscal targets. We show the presence of a policy trade-off. Pension reforms that increase the retirement age have a large positive effect on output, but a small (and often negative) effect on the current account. In contrast, reforms that cut pension benefits improve the current account balance but reduce output. Mixed pension reforms, which extend the working life and cut pension benefits, can simultaneously boost output and the current account.
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A-D curve aggregate labor Alexander Ludwig boost Catalan cohorts Consumption Profiles consumption tax rate current account balance current account effects cut pension benefits decision Table decline domestic investment effects of pension entered the labor equilibrium Figure fraction of output given government debt household household’s age Household’s Disposable Income household’s optimization problem household’s problem hump-shaped increase the retirement indicates natural age inter-temporal INTERNATIONAL MONETARY FUND Journal labor supply elasticity labor-augmenting technological progress large positive effect leisure lifetime consumption line with output Long-Run Tradeoff macroeconomic natural age 23 net wage order condition output and current parameter values payroll tax pension benefit cuts pension benefit formula pension reforms pension system percent of GDP population aging primary balance problem at date Profiles by Age rate of labor-augmenting reduce reﬂecting Reforms on Household’s reforms that increase retirement age small open economy target Tradeoff between Output value function wage earnings wage income