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Pension reform in an OLG model with heterogeneous abilities

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  • BUYSE, TIM
  • HEYLEN, FREDDY
  • VAN DE KERCKHOVE, RENAAT

Abstract

We study the effects of pension reform on hours worked, human capital, income and welfare in an open economy populated by four overlapping generations: three active generations (the young, the middle aged and the older) and one generation of retired. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Our simulation results prefer a pay-as-you-go pension system with a particular earnings-related linkage above a fully-funded private system. This pay-as-you-go system conditions pension benefits on past individual labor income, with a high weight on labor income earned when older and a low weight on labor income earned when young. Uncorrected, however, such a system implies welfare losses for current low-ability generations and rising inequality. Complementing or replacing it by basic and/or minimum pension components is negative for aggregate employment and welfare. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate. An additional correction improving the welfare of low-ability individuals would be to maintain for these individuals equal weights on past labor income.

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  • Buyse, Tim & Heylen, Freddy & Van De Kerckhove, Renaat, 2017. "Pension reform in an OLG model with heterogeneous abilities," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(2), pages 144-172, April.
  • Handle: RePEc:cup:jpenef:v:16:y:2017:i:02:p:144-172_00
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    Cited by:

    1. Brecht Boone & Freddy Heylen, 2019. "Cross‐Country Differences in Unemployment: Fiscal Policy, Unions, and Household Preferences in General Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 1270-1302, July.
    2. Willem Devriendt & Freddy Heylen, 2017. "Macroeconomic and distributional effects of demographic change in an open economy - The case of Belgium -," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/931, Ghent University, Faculty of Economics and Business Administration.
    3. repec:spr:joecin:v:16:y:2018:i:4:d:10.1007_s10888-018-9391-0 is not listed on IDEAS
    4. Joanna Tyrowicz & Krzysztof Makarski & Marcin Bielecki, 2018. "Inequality in an OLG economy with heterogeneous cohorts and pension systems," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 16(4), pages 583-606, December.
    5. Loumrhari, Ghizlan, 2016. "Vieillissement démographique et réforme paramétrique des retraites. Les enseignements d’un modèle EGC-GI pour le Maroc
      [Ageing and pension reform. A computational olg model for Morocco]
      ," MPRA Paper 74077, University Library of Munich, Germany.
    6. repec:eee:jpolmo:v:41:y:2019:i:4:p:586-606 is not listed on IDEAS
    7. Willem Devriendt & Freddy Heylen, 2018. "Coping With Demographic Change: Macroeconomic Performance And Welfare Inequality Effects Of Public Pension Reform," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 18/948, Ghent University, Faculty of Economics and Business Administration.
    8. Freddy Heylen & Pieter Van Rymenant & Brecht Boone & Tim Buyse, 2016. "On The Possibility And Driving Forces Of Secular Stagnation - A General Equilibrium Analysis Applied To Belgium -," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 16/919, Ghent University, Faculty of Economics and Business Administration.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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