By Huixin Bi Sarah Zubairy

We explore the evolution of pension policy across countries and investigate the macroeconomic impact of pension structural reforms in recent decades, in particular those with implementation delays. We first document chronological changes in pension policy for ten OECD countries between 1962 and 2017. The new data set uncovers that changes in pension policy come in waves, with a rapid expansion of pension systems between 1960s and 1980s followed by a wave of retrenchments since 1990s. Structural pension reforms, which are motivated by long-run fiscal sustainability concerns, often come with significant implementation delays. We find that in response to structural pension retrenchments without delays, people close to retirement stay in the work force longer to compensate for the decline in their pensions, leading to a decline in old-age pension spending. News about structural pension retrenchment in the future, however, lead the marginal group of population to exit the labor market prior to the reform being implemented. As a result, government spending on old age pensions tend to increase, rather than decrease, over the medium term. This channel of fiscal foresight is particularly prevalent for pension reforms that change retirement age and contribution years and that come with longer implementation delays.

Source: SSRN