Shifting from pay-as-you-go to individual retirement accounts: A path to a sustainable pension system

Hsuan-Chih Lin, Atsuko Tanaka and Po-Shyan Wu

Journal of Macroeconomics, 2021, vol. 69, issue C

Abstract: With aging demographics and generous pension programs, the sustainability of the pay-as-you-go (PAYG) public pension system has been often questioned and has motivated policymakers to enact reforms in many countries. Although mandatory funded Individual Retirement Accounts (IRAs) appear to be a solution to this unsustainable system, existing reforms usually take place within the PAYG system by reducing pension benefits. This paper evaluates the effects of PAYG reforms as well as reforms that switch to the IRA system. Our analysis shows that PAYG reforms outperform IRA reforms in many aspects. In fact, PAYG reforms achieve higher GDP and yield higher welfare in the long run. The transition to the steady state is also found to be less volatile for PAYG reforms. While PAYG generally places a larger burden on future generations, the positive welfare effect of cross-subsidization dominates the welfare loss. Our findings may explain why pension reform is a controversial issue in most countries and why we rarely observe a shift to the IRA system.

Keywords: Pension reform; Individual retirement account; Labor supply; Intensive and extensive margin; Welfare analysis (search for similar items in EconPapers)
JEL-codes: E2 E6 H5 J2 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:69:y:2021:i:c:s0164070421000355

DOI: 10.1016/j.jmacro.2021.103329

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