Sustainability of pension reforms: An EU-wide political stress

Sefane Cetin (sefane.cetin@student.uclouvain.be) and Jean Hindriks
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Sefane Cetin: Université catholique de Louvain, LIDAM/CORE, Belgium

No 2023016, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Many countries have adopted various pension reforms to deal with aging population. Those reforms involve some balance between ”refinancing” (contribution increase) and ”retrenchment” (benefit cut). The question we address is whether policymakers have the future capacity to sustain the legislated pension reforms in the EU given the growing influence of the elderly in the democratic process. To answer this question, we draw on the 2021 Economic Policy Committee (EPC) projections of pension benefit rates that we compare with the policy adjustments over the amount of refinancing and benefit cut arising from continuously negotiated reforms over time between the successive cohorts of workers and retirees. We compute the optimal bargaining trajectory of benefit and contribution rates that match the aging population. We then use the ”democratic gap” as a political stress test. This democratic gap measures how the implicit bargaining power that rationalizes the projected pension benefits deviates from the population shares. We complement the analysis with the ”benefit gap” that measures how the projected pension benefits deviate from the bargaining outcome when bargaining power evolves according to population aging.

Keywords: Pension reform; Aging; Bargaining; Sustainability; Stress test (search for similar items in EconPapers)
JEL-codes: D63 H55 J18 (search for similar items in EconPapers)
Pages: 26
Date: 2023-05-31
New Economics Papers: this item is included in nep-age, nep-eec and nep-pbe
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