Pension Reform, Private Saving, and the Current Account in a Small Open Economy

Axel Schimmelpfennig

No 2000/171, IMF Working Papers from International Monetary Fund

Abstract: The macroeconomic implications of a pension reform that substitutes a high-return fully-funded system for a low-return pay-as-you-go system are discussed in an overlapping generations, neoclassical growth model. With forward-looking individuals, a debt-financed reform worsens the current account, while a tax-financed reform leaves the current account unchanged. With myopic individuals, a debt-financed reform leaves the current account unchanged, while a tax-financed reform improves the current account. Hence, tax-financing, which is equivalent to pre-funding, should be the preferred reform strategy in a small open economy with a weak current account position.

Keywords: WP; current account; rate of return; open economy; pension reform; saving; PAYG pillar; pillar saving; FF pillar; PAYG system; budget constraint; Pension spending; Private savings; Pensions; Payroll tax (search for similar items in EconPapers)
Pages: 30
Date: 2000-10-01
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Citations: View citations in EconPapers (4)

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