Public Sector Pension Policies and Capital Accumulation in Emerging Economies

In many emerging economies pension programs of public sector workers are more generous than pension programs of private sector workers. In this paper we investigate public pension reforms that improve efficiency and welfare by reallocating government resources from non-productive public pensions to productive public education and infrastructure investments. We argue that the opportunity costs of running generous public pension schemes for civil servants are potentially large in emerging economies that often suffer from low public investments in education and infrastructure. In addition, we quantitfy the savings distortions as well as the tax distortions from running a generous public pension program. Calculating transitions to the post-reform steady state, we find that welfare losses for the generation born before the reform are offset by welfare gains by the generations born after the reform.