Working Paper: CEPR ID: DP18181
Authors: Burkhard Heer; Vito Polito; Michael R. Wickens
Abstract: Using an overlapping generations model, two new indicators of public pension system sustainability are proposed: the pension space, which measures the capacity to pay for pension expenditures out of labour taxation, and the pension space exhaustion probability reflecting demographic uncertainties. These measures reveal that the pension spaces of advanced economies are strikingly different. Most nations have little scope to further finance pensions out of labour income taxation over the next thirty years. There is no one-size-fits-all solution. Risk-equivalent pension reforms enhance welfare in the long run, particularly for rapidly ageing nations, but also entail non-negligible transitional costs.
Keywords: ageing; fiscal space; public pension sustainability; overlapping generations model
JEL Codes: E62; H55; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor income taxation (H31) | pension space (p s) (H55) |
| pension system generosity (H55) | pension space (p s) (H55) |
| pension space (p s) (H55) | ability to finance pensions through labor income taxation (J32) |
| demographic uncertainties (J11) | sustainability of pension systems (H55) |
| economic conditions (E66) | sustainability of pension systems (H55) |
| policy reform (E69) | pension sustainability (H55) |
| risk-equivalent pension reforms (H55) | long-term welfare gains (D69) |
| risk-equivalent pension reforms (H55) | short- to medium-term transitional costs (J32) |