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Preventing Reforming Unequally
By Axel H. Boersch-Supan, Klaus Härtl, Duarte Nuno Leite & Alexander Ludwig
Population aging has forced policy makers in most developed countries to reform pension systems with the aim to maintain or re-establish financial sustainability. This usually involves cost-cutting measures like later pension eligibility ages and lower replacement rates. Such reforms face harsh trade-offs with the objective of providing adequate pensions. Social welfare and inequality have emerged as crucial concerns about recent pension reforms, stressing that the lack of ‘social sustainability’ may undermine financial sustainability. This paper analyzes such trade-offs. The novelty of the paper is to evaluate reform effects on financial sustainability, social welfare and intra- and intergenerational equality in a rich unified framework with several dimensions of heterogeneity and various behavioral reactions. Our simulations shed light on the complex distributional effects of pension reform on different cohorts and societal groups. These multifaceted trade-offs call for a broad mix of specific pension policies if one aims to maximize social welfare or voters’ approval.
Source: SSRN
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