Intergenerational consequences of pension reforms: Tension between democracy and equality

Arno Baurin and Jean Hindriks
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Arno Baurin: Université catholique de Louvain, LIDAM/IRES, Belgium

No 2022008, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Pension reforms, required to address the financial challenge of an ageing population, involve changing the accrual rate or the indexation rates. The accrual rate is the rate at which pension benefit is built up for each year of work. The indexation rate is the rate at which pension benefit is tied to the nominal wage growth. In this paper, we study the prospective consequences of indexation and accrual reforms and show the existence of a tension between democracy and equality. Simulating the effects of long-term budget balancing reforms, we show that 80% of the population prefers accrual over indexation reforms, with the implication that the youngest half of the population would bear 85% of the total adjustment cost. Then, we consider alternative pension reforms improving the generational balance (including policy mix and contribution reforms), and we show that all those reforms fail to get majority support. Finally we show that even though indexation reform is preferable in terms of work incentives, that does not change vote incentives. So, the tension is also between democracy and efficiency.

Keywords: Pension reform; Ageing; Generational balance; Prospective incidence; Indexation; Fiscal balance (search for similar items in EconPapers)
JEL-codes: D63 D64 H55 I38 (search for similar items in EconPapers)
Pages: 30
Date: 2022-02-11
New Economics Papers: this item is included in nep-age, nep-dem, nep-eur and nep-pbe
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