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Endogenous retirement and public pension system reform in Spain

  • Sánchez Martín, Alfonso R.

Population aging has spurred developed countries around the world to reform their PAYG pension systems. In particular, delaying legal retirement ages and reducing the generosity of pension benefits have been widely implemented changes. This paper assesses the potential success of these policies in the case of the Spanish economy, and compares them with the results obtained by the (rather modest) reforms already implemented in 1997 and 2001. This evaluation is accomplished in a heterogeneous-agent dynamic general equilibrium model where individuals can adjust their retirement ages in response to changes to the pension rules. We check the ability of the model to reproduce the basic stylized facts of retirement behavior (particularly the pattern of early retirement induced by minimum pensions). The model is then used to explore the impact of pension reforms. We find that already implemented changes actually increase the implicit liabilities of the system. In contrast, delaying the legal retirement age and extending the averaging period in the pension formula to cover most of the individual's life-cycle can reduce the implicit liabilities substantially. These findings reveal the failure of the Spanish political system to distribute the costs of population aging more evenly across the generations.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 1 (January)
Pages: 336-349

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:1:p:336-349
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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