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Coping with Spain's aging: retirement rules and incentives

  • CATALÁN, MARIO
  • GUAJARDO, JAIME
  • HOFFMAISTER, ALEXANDER W.

This paper evaluates the macroeconomic and welfare effects of extending the averaging period used to calculate pension benefits in a pay-as-you-go system. It also examines the complementarities between reforms extending the averaging period and those increasing the retirement age under alternative tax policies. The analysis is based on a model in the Auerbach-Kotlikoff tradition applied to the Spanish economy. Without reforms, the simulations suggest that aging-related spending as a share of output will increase 16 percentage points by 2050, which are twice as much as in European Commission (2006) projections due to general equilibrium effects. Also, reforms extending the averaging period to the entire work life limit expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy (4 percentage points of GDP). These reforms and prefunding the demographic shock mitigate the adverse macroeconomic effects of aging and improve welfare.

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Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 9 (2010)
Issue (Month): 04 (October)
Pages: 549-581

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Handle: RePEc:cup:jpenef:v:9:y:2010:i:04:p:549-581_99
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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  1. Assar Lindbeck & Mats Persson, 2003. "The Gains from Pension Reform," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 74-112, March.
  2. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
  3. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1980. "Reconsidering the Work Disincentive Effects of Social Security," NBER Working Papers 0562, National Bureau of Economic Research, Inc.
  4. Alfonso R Sánchez-Martín, 2008. "Endogenous Retirement and Public Pension System Reform in Spain," Working Papers 08.06, Universidad Pablo de Olavide, Department of Economics.
  5. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  6. Laurence J. Kotlikoff & Kent Smetters & Jan Walliser, 1999. "Privatizing Social Security in the U.S. -- Comparing the Options," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 532-574, July.
  7. Jimeno, Juan F. & Rojas, Juan A. & Puente, Sergio, 2008. "Modelling the impact of aging on social security expenditures," Economic Modelling, Elsevier, vol. 25(2), pages 201-224, March.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  9. Ángel Estrada & José Luis Fernández & Esther Moral & Ana V. Regil, 2004. "A quarterly macroeconometric model of the Spanish Economy," Banco de Espa�a Working Papers 0413, Banco de Espa�a.
  10. Laurence J. Kotlikoff, 1998. "The A-K Model: It's Past, Present, and Future," NBER Working Papers 6684, National Bureau of Economic Research, Inc.
  11. Juan A. Rojas, . "Life-cycle Earnings Cohort Size Effects and Social Security. A Quantitative Exploration," Studies on the Spanish Economy 88, FEDEA.
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