Pension Reform and the Fiscal Policy Stance

IMF Working Papers, December 1, 2001

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Pension Reform and the Fiscal Policy Stance

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Bibliographic details

• Authors: Philip R. Gerson, George A Mackenzie, Peter S. Heller, Alfredo Cuevas
• Published: December 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451874990.001

Summary and principal finding

• The increased budget deficit caused by the privatization of a public pension plan does not imply a relaxation of the stance of fiscal policy.
• The reform's impact on the fiscal stance and national saving depends primarily on:
  • its effect on the sum of explicit and implicit public debt, and
  • the post-reform payroll tax and private system contribution rates.
• The precise impact of reform also depends on influences such as the relationship between the rates of interest on implicit and explicit public debt.
• There may be circumstances in which pension privatization, if not offset by fiscal consolidation, will loosen the fiscal stance.

Mechanisms and determinants analyzed

• Explicit and implicit public debt: the sum of these determines much of the fiscal impact.
• Contribution and tax rates: post-reform payroll tax and private system contribution rates are key determinants of national saving and fiscal stance.
• Interest-rate relationships: the relationship between rates of interest on implicit and explicit public debt influences the net effect of reform.
• Scenarios noted: privatization can increase the budget deficit; without offsetting fiscal consolidation, privatization can loosen fiscal stance.

Policy implications and recommendations (implicit)

• Fiscal consolidation may be required to prevent pension privatization from loosening the fiscal stance.
• Assessments of pension reform should focus on changes in explicit plus implicit public debt and on post-reform payroll tax and private contribution rates.
• Consider the relative interest rates on implicit versus explicit public debt when evaluating reform outcomes.

Subject areas and keywords

• Subject: Expenditure, Fiscal policy, Labor, National accounts, Pension reform, Pension spending, Pensions, Private savings
• Keywords: cash-flow deficit, contribution rate, debt, debt default risk, deficit, deficit target, explicit debt, fiscal balance, implicit debt, increase saving, interest rate, old age pension, pension fund saving, pension reform, Pension spending, Pensions, Private savings, rate, rate of return, saving rate, savings behavior, social security, WP

Content in this bundle

• Pension Reform and the Fiscal Policy Stance - WP/01/214
  • Pension Reform and the Fiscal Policy Stance - WP/01/214 (Markdown version)
  • Pension Reform and the Fiscal Policy Stance - WP/01/214 (PDF)