This paper discusses a study analyzing aging populations and public pension schemes. An aging society is characterized by a growing proportion of the retired to the active working population. The study examines the pension-related aging problem primarily from a fiscal perspective. It analyzes how prospective demographic developments that affect the proportion of the pensionable elderly affect pension outlays. It confirms that very serious fiscal stresses are in prospect for most industrial economies. Addressing such problems satisfactorily will require major actions early, given the long lead times involved in reforming a pension fund's financial position.
An aging society is characterized by a growing proportion of the retired to the active working population. Societies age either when fertility rates decline so that fewer children are born, or when longevity increases, or both. Aging affects virtually all societies today, but more so the industrial countries, which have generally experienced it over a longer period and for which further pronounced aging is projected over the next four decades, at the end of which a peak in the proportion of the elderly is likely to be attained. Concerns about the challenges posed by aging populations have moved to the forefront of the public policy debate in many countries. This paper attempts to respond to some of these concerns, focusing in particular on the fiscal sustainability of public pension schemes in industrial countries.
Projections of demographic trends reflect assumptions about future variations in fertility, life expectancy, and immigration flows.2 Present rates of fertility (the number of children born to an average woman during her lifetime) differ considerably across the selected industrial countries, ranging from historically low values of 1.3 (Germany, Italy) to highs of 2.1 (United States, Sweden). Over the next four decades, the demographic scenarios assume, perhaps optimistically, that the fertility rate in all countries will converge to the level needed to maintain a stable population, that is, about 2.1. However, trends in fertility rates are notoriously difficult to predict.3 Although deviations from the fertility assumptions underlying the projections will not affect the projected number of elderly persons, they could nevertheless have sizable effects on the projected number of persons of young and working age. Life expectancy at birth of both sexes is projected to increase by some five years until 2050, with most of the added longevity occurring before 2020. In light of present political realities, net immigration flows in most of the industrial countries are assumed to taper off quickly from observed levels during the early 1990s, falling to zero in most countries after 2005. Only Canada and the United States are assumed to have positive (but declining) net immigration beyond 2005.
This section outlines the analytical and empirical approach adopted for assessing the long-run fiscal impact of a public pension system.15 The section also presents projections of the fiscal consequences of preserving current public pension arrangements.
This Selected Issues paper focuses on the medium-term budgetary framework (MTBF) for Austria. Austria is part of a trend among many countries to consider some form of MTBF. This paper describes the proposed framework in Austria and assesses it in light of the experience of other countries. The general conclusion is that the track records are mixed, but that, on balance, the experiences with MTBFs have been favorable. The paper also examines the long-term fiscal challenges arising from demographic change.
This Selected Issues paper explores the economic consequences of aging and its impact on long-term fiscal sustainability for Cyprus. The study analyzes the potential macroeconomic impact of different approaches to deal with the fiscal costs of aging. It goes beyond a simple quantification of the fiscal impact by explicitly examining the trade-offs of alternative policies within the context of a general equilibrium overlapping generation framework. It is concluded that addressing the fiscal consequences of aging will require increasing the retirement age to 65 years, followed by further increases to keep up with demographic trends.
Austria has probably the world’s highest pension expenditures relative to its economic size, largely because of the generosity of its pension system. This paper examines the institutional setup of the Austrian pension system and projects its future development based on current policies. The projection results show a swift financial worsening. With the already high level of contribution rates, pension expenditures, and budget transfers, the results underscore the need for reform. Much of this reform can, however, be achieved by maintaining the structure of the system and adjusting some of its key parameters. The paper outlines options for such a reform.
This paper discusses the strategic building blocks of pension reform. The early sections set out the simple economics of pensions and discuss a series of myths which have proved remarkably persistent. Subsequent sections draw together the conclusions for policy design from earlier theoretical discussion, set out the prerequisites which any pension reform must respect, and discuss the range of choices facing policymakers. The main conclusions are threefold: the key variable is effective government; from an economic perspective the difference between PAYG and funding is second order; and the range of potential choice over pension design is wide.
The previous section pointed to the need for major pension adjustments for most major industrial countries so as to ensure that their public pension systems are sustainable and to prevent a buildup in pension-related debt. It was further noted in the previous section that improvements in the macroeconomic environment would be helpful. While there may be some scope for fiscal measures not related to pensions, for most countries the emphasis will have to be on reforming the pension arrangements themselves. This section reviews several such reforms, of both a parametric and a systemic nature, and attempts to quantify the fiscal impact of reforms on the financial position of the public pension system. It is more difficult to quantify the effect of reform options on the overall fiscal position. Broadly, most parametric reforms are likely to improve the overall fiscal position of government if there is not much offset from the non-pension part of the budget. By contrast, the overall fiscal balance effect of partial advance funding is more controversial; it has been argued that the accumulation of pension fund reserves may loosen the overall budget constraint, in particular if pension fund surpluses count toward overall deficit reduction. Regarding the overall fiscal impact of systemic reforms, this will partly depend on whether transition costs are financed by debt accumulation or taxes.
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