A Tradeoff between the Output and Current Account Effects of Pension Reform

December 3, 2012

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Mario Catalan, and Nicolas E Magud. A Tradeoff between the Output and Current Account Effects of Pension Reform, (USA: International Monetary Fund, 2012) accessed November 21, 2024

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

We compare 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. We show the presence of 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. In contrast, 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.

Subject: 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

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/283
Stock No:

WPIEA2012283
ISBN:

9781475563948
ISSN:

1018-5941

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