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Ignorance is bliss: Should a pension reform be announced?

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  • Fedotenkov, Igor

Abstract

This paper studies whether a pension reform, namely a switch from a pay-as-you-go (PAYG) to a more-funded scheme should be announced. We show that such an announcement increases savings, leading to a decline in interest rates. Smaller returns to savings lead to higher losses for the first transitional generation, which suffers from the reform the most. On the other hand, higher savings by the first transitional generation lead to faster capital accumulation, which benefits younger generations. We argue that if a government cares about the agents with the most to lose, it may more beneficial not to announce such a reform.

Suggested Citation

  • Fedotenkov, Igor, 2016. "Ignorance is bliss: Should a pension reform be announced?," Economics Letters, Elsevier, vol. 147(C), pages 135-137.
  • Handle: RePEc:eee:ecolet:v:147:y:2016:i:c:p:135-137
    DOI: 10.1016/j.econlet.2016.08.029
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    References listed on IDEAS

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    1. Carroll, Christopher D & Overland, Jody & Weil, David N, 1997. "Comparison Utility in a Growth Model," Journal of Economic Growth, Springer, vol. 2(4), pages 339-367, December.
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    3. Olivier Cardi & Romain Restout, 2014. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Open Economies Review, Springer, vol. 25(2), pages 373-406, April.
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    6. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-181, May.
    7. Homburg, Stefan, 1990. "The Efficiency of Unfunded Pension Schemes," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 640-647.
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    9. Butler, Monika, 1999. "Anticipation effects of looming public-pension reforms," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 119-159, June.
    10. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Other publications TiSEM 8830bc21-4138-4479-8459-a, Tilburg University, School of Economics and Management.
    11. Maria I. Marika Santoro, 2006. "Early Announcement of a Public Pension Reform in Italy," Rivista di Politica Economica, SIPI Spa, vol. 96(5), pages 179-216, September.
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    More about this item

    Keywords

    Pension reform; Announcement; Savings; Interest rate;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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