Which reforms for a fair and sustainable pension system?

Micael Castanheira and Vincenzo Galasso

Reflets et perspectives de la vie économique, 2011, vol. L, issue 3, 187-202

Abstract: In the absence of reform, the cost of pension is set to become unsustainable for our social security system. Two types of potential structural reforms are often considered: the move towards a fully funded system, or towards a system of notional accounts. In this paper, we review the strengths and weaknesses of the three regimes. The current, pay-as-you-go (PAYG), system allows better redistribution but tends to produce structural deficits. Funded systems are actuarially fair and boost national savings, but are subject to the same risks as financial markets. The solution thus seems set to be found in notional accounts. That system is similar to the PAYG system in remaining public and unfunded, but the pension benefit is more closely tied to the contribution made during ones? working life. We however argue that such a reform must be led together with a reduction in inequalities in the labour market, to ensure that unemployment spells do not hit particular fringes of the population, while others are sheltered. In particular, early spells of unemployment can prove very costly for one?s eventual pension benefits.

Date: 2011
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