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Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus

Author

Listed:
  • Mr. Willy A Hoffmaister
  • Mr. Jaime Guajardo
  • Mr. Mario Catalan

Abstract

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Suggested Citation

  • Mr. Willy A Hoffmaister & Mr. Jaime Guajardo & Mr. Mario Catalan, 2008. "Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus," IMF Working Papers 2008/098, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/098
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    References listed on IDEAS

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    3. Alexander W. Hoffmaister & Mario Catalan & Jaime Guajardo, 2007. "Addressing the Macroeconomic Consequences of Aging in Cyprus: The Case for Pension Reform," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 1(1), pages 3-25, June.
    4. David Weil, 2006. "Population Aging," Working Papers 2006-09, Brown University, Department of Economics.
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    Cited by:

    1. Jan HANOUSEK & Evžen KOČENDA, 2009. "Public investment and growth in New EU member states: an overview," Departmental Working Papers 2009-23, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    2. Tanida Arayavechkit & Somprawin Manprasert & Jaree Pinthong, 2015. "Intertwining Inequality and Labor Market under the New Normal," PIER Discussion Papers 6, Puey Ungphakorn Institute for Economic Research.
    3. Tanida Arayavechkit & Somprawin Manprasert & Jaree Pinthong, 2015. "Intertwining Inequality and Labor Market under the New Normal," PIER Discussion Papers 6., Puey Ungphakorn Institute for Economic Research, revised Oct 2015.

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    Keywords

    WP; lump sum; retirement age;
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