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Pension reform and growth

  • Corsetti, Giancarlo
  • Schmidt-Hebbel, Klaus

The authors review the qualitative macroeconomic and welfare implications of replacing a pay-as-you-go pension system with a fully funded scheme. They summarize the typically small effects found in the simulations literature, based on exogenous-growth one-sector models. Much larger, and sustained, effects are obtained in the framework of an overlapping-generations model with endogenous growth and formal-informal production sectors - the model presented in this paper. Model simulations using the overlapping-generations model suggest that replacing a pay-as-you-go system with a fully funded system could substantially raise long-term growth rates by eliminating the incentives (under the pay-as-you-go system) to informalize production and employment. A final look at Chile's reform experience suggest that a structural transformation toward formalization is taking place and that both private savings and growth have been rising substantially since 1980. Econometric evidence suggests that Chile's pension reform, in 1981, could be contributing toward Chile's large increase in private savings.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1471.

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Date of creation: 30 Jun 1995
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Handle: RePEc:wbk:wbrwps:1471
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  1. Jones, Larry E. & Manuelli, Rodolfo E., 1992. "Finite lifetimes and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 171-197, December.
  2. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  3. Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1981. "The Efficiency Gains from Dynamic Tax Reform," NBER Working Papers 0819, National Bureau of Economic Research, Inc.
  4. Homburg, Stefan, 1990. "The Efficiency of Unfunded Pension Schemes," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 640-647.
  5. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  6. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  7. 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.
  8. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
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