A Tradeoff between the Output and Current Account Effects of Pension Reform
IMF Working Papers, December 3, 2012
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- A Tradeoff between the Output and Current Account Effects of Pension Reform
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Bibliographic details
- Authors: Mario Catalan, Nicolas E Magud
- Published: December 3, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475563948.001
Summary and central finding
- The paper compares the long-term output and current account effects of pension reforms that increase the retirement age with those of reforms that cut pension benefits, conditional on reforms achieving similar fiscal targets.
- Central result: there is a policy trade-off.
- Pension reforms that increase the retirement age have a large positive effect on output, but a small (and often negative) effect on the current account.
- Reforms that cut pension benefits improve the current account balance but reduce output.
- Mixed pension reforms, which extend the working life and cut pension benefits, can simultaneously boost output and the current account.
Methodological approach and scope
- Topic areas: Aging; Balance of payments; Current account; Expenditure; Labor; Pension reform; Pension spending; Pensions; Population and demographics.
- Keywords: aggregate flow constraint, Aging, current account, current account effect, dyamic general equilibrium model, effects of pension reforms, external balance, factor income, investment position, output-current account tradeoff, Pension reform, Pension spending, Pensions, policy trade-off, return on assets, saving decline, WP.
- Working Paper context: research in progress intended to elicit comments and further debate; views expressed are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.
Main findings (enumerated)
- Increasing the retirement age:
- Large positive effect on output.
- Small and often negative effect on the current account.
- Cutting pension benefits:
- Improves the current account balance.
- Reduces output.
- Mixed reforms (extend working life + cut benefits):
- Can simultaneously boost output and the current account.
Policy implications and recommendations
- Policymakers face a trade-off between policies that favor output growth and those that improve the external balance.
- To achieve simultaneous improvements in output and the current account, consider mixed pension reforms that both extend the working life and reduce pension benefits.
- Fiscal targets can be met through different reform designs that have distinct macroeconomic trade-offs; reform design should account for desired balance between output and current account objectives.