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Coping with Spain's Aging: Retirement Rules and Incentives

Author/Editor: Catalán, Mario | Guajardo, Jaime | Hoffmaister, Alexander W.
Authorized for Distribution: May 1, 2007
Electronic Access: Free Full Text (PDF file size is 696KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper evaluates the macroeconomic and welfare effects of extending the averaging period used to calculate pension benefits in a pay-as-you-go system. It also examines the complementarities between reforms extending the averaging period and those increasing the retirement age under alternative tax policies. The analysis is based on a model in the Auerbach-Kotlikoff tradition applied to the Spanish economy. Without reforms, the simulations suggest that aging-related spending as a share of output will increase 16 percentage points by 2050, which are twice as much as in European Commission (2006) projections due to general equilibrium effects. Also, reforms extending the averaging period to the entire work life limit expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy (4 percentage points of GDP). These reforms and prefunding the demographic shock mitigate the adverse macroeconomic effects of aging and improve welfare.
 
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Series: Working Paper No. 07/122
Subject(s): Pension regulations | Aging | Spain | Economic models
Author's keyword(s): Pension reform | dynamic general equilibrium model | Spanish pension system
 
English  
    Published:   May 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007122   Pages:   51
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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