Initiate Deficits to Strengthen Public Finances: The Role of Private Pensions
By Ales Berk, Dragan Jovanovic & Joze Sambt
In this paper we use our comprehensive pension system model calibrated to the real demographic, employment and retirement data, measure transition costs of implementing mandatory private second-pillar into the pension landscape and consider fiscal sustainability of pension system. We report sensitivity to the most relevant parameters both within a second-pillar and a pay-as-you-go, and argue that fiscal sustainability and improved (higher) accrual rates are not incompatible policy goals if only pension reform is properly designed and implemented early enough. The introduction of a private pension pillar has to be implemented in times when public debt burden remains manageable and has to be accompanied by further parametric reform within the pay-as-you-go system that keeps the system fiscally stable, as well as that further improves net accrual rates. We call for reconsideration of pension policy reversals that happened after 2008 in quite some countries.
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