An economy in transition: Costs of pension reform in an overlapping generations model

• Main Authors: Chua, Evelyn C., Chua, Naomi Abigail S., Ng, Katrina D., Uy, France Isa T.
• Format: text
• Language: English
• Published: Animo Repository 2008
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14761
• Institution: De La Salle University

Ageing, as a phenomenon, is slowly becoming a much debated topic of research by pension reform authorities of differing economics. Neither industrialized nor developing economies is immune to the impending ageing phenomenon that is predicted by the United Nations (UN) Population Report to reach its peak by 2050. Authors have been consistent in forwarding the idea of pension reforms to economies that are struggling with the financial sustainability of their traditional Pay-As-You-Go (PAYG) system. Modern pension systems such as Mixed and Fully Funded pension systems have been determined suitable by comparing the steady state welfare effects that an economy might achieve under either of the concerned the steady state welfare effects that an economy might achieve under either of the concerned pension system. Conveniently, from independent calculations using of the stylized overlapping generations model (OLG) under a closed economy framework, this paper has also arrived at the predominant conclusion that a Fully Funded pension system induces a greater positive welfare effect. There is however a lack of literature that takes into account the transitional costs inherent in pension reforms. Such cost considerations are crucial in helping economies strategize on the more cost-minimizing pension reform path to undertake. Hence, it has also been the goal of this paper to provide a theoretical framework that highlights transitional costs incurred by taking varying transition paths towards reaching a desired pension system. Through comparing aggregate costs of shifting, it is apparent that the PAYG-Mixed-Fully Funded pension system-a two tier pension reform path –showcases a less costly alternative compared to the single tiered PAYG-Fully Funded and Mixed-Fully Funded pension reform paths. In terms of providing policy makers with the right theoretical bases for making decisions concerning policy reforms, these findings can allow such economies to mitigate financial and social cost of transition.