Intergenerational consequences of gradual pension reforms

Arno Baurin and Jean Hindriks
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Arno Baurin: Université catholique de Louvain, LIDAM/IRES, Belgium

No 3217, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Balancing the government budget in an aging economy may require adjusting gradually pension benefits. Such policy change can take two forms: adjusting the accrual rate (the rate at which individuals built-up pension entitlements while working) or the indexation rate (the rate a which accrued entitlements are linked to nominal wage growth). We compare the consequences of such gradual policies across cohorts. We identify a fundamental generational trade-off between democracy and equality. In particular, we show that for Belgium, 80% of the population alive at the time of the reform prefers the accrual to the indexation reform, with the implication that the youngest half of the population would bear 85% of the total adjustment cost. The indexation reform provides more generational equality because the phasing in over time has larger base and thus benefit cut can be smaller per capita. We then consider other reforms improving the generational equality, showing that all those reforms fail to gain majority support. Finally, considering labor incentives, we show that the indexation reform is also more efficient than the accrual reform. Efficiency meets generational equality.

Keywords: Pension reform; Ageing; Generational balance; Prospective incidence; Indexation; Fiscal balance; Gradualism (search for similar items in EconPapers)
JEL-codes: D63 D64 H55 I38 (search for similar items in EconPapers)
Pages: 14
Date: 2022-11-13
Note: In: European Journal of Political Economy, 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3217

DOI: 10.1016/j.ejpoleco.2022.102336

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