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

The macroeconomic implications of a pension reform that substitutes a high-return fully-funded system for a low-return pay-as-you-go system are discussed in an overlapping generations, neoclassical growth model. With forward-looking individuals, a debt-financed reform worsens the current account, while a tax-financed reform leaves the current account unchanged. With myopic individuals, a debt-financed reform leaves the current account unchanged, while a tax-financed reform improves the current account. Hence, tax-financing, which is equivalent to pre-funding, should be the preferred reform strategy in a small open economy with a weak current account position.
Publication date: October 2000
ISBN: 9781451858495
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Finance , Finance , Public Policy- Social Security , Public Policy- Social Security , pension reform , saving , pension , private saving , pension system , payroll tax

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