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

_IMF Working Papers, October 1, 2000_

## Source details

**Canonical URL:** [Pension Reform, Private Saving, and the Current Account in a Small Open Economy](https://www.imf.org/en/publications/wp/issues/2016/12/30/pension-reform-private-saving-and-the-current-account-in-a-small-open-economy-3825)

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## Bibliographic details
- Authors: Axel Schimmelpfennig
- Published: October 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858495.001

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### Summary / Abstract
- The paper analyzes the macroeconomic implications of substituting a high-return fully-funded pension system for a low-return pay-as-you-go (PAYG) system.
- Framework: overlapping generations, neoclassical growth model.
- Financing modes considered: debt-financed reform versus tax-financed reform (tax-financing is equivalent to pre-funding).
- Behavioral assumptions compared: forward-looking individuals versus myopic individuals.

### Key findings
- With forward-looking individuals:
  - A debt-financed reform worsens the current account.
  - A tax-financed reform leaves the current account unchanged.
- With myopic individuals:
  - A debt-financed reform leaves the current account unchanged.
  - A tax-financed reform improves the current account.
- Policy implication drawn: tax-financing (pre-funding) should be the preferred reform strategy in a small open economy with a weak current account position.

### Model and mechanisms (concise)
- Reform studied: substitution of a high-return fully-funded pillar for a low-return PAYG pillar.
- Core mechanism: interaction of financing method (debt vs tax) with private saving responses under different expectation formations (forward-looking vs myopic) determines current account outcomes.

### Policy recommendations
- Prefer tax-financing (pre-funding) over debt-financing when implementing a shift toward a fully-funded pension pillar in a small open economy, especially if the economy has a weak current account position.

*Axel Schimmelpfennig, "Pension Reform, Private Saving, and the Current Account in a Small Open Economy", IMF Working Paper No. 2000/171 (October 1, 2000).*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/pension-reform-private-saving-and-the-current-account-in-a-small-open-economy-3825_