CAN THE CAPITAL GAINS ARISING FROM ANUNFUNDED PENSIONS REFORM MAKE IT PARETOIMPROVING?

If unfunded pensions crowd-out private savings, pensions reform should raise the timepath of capital. Even if reform has long-run benefits, there will still be a “doubleburden”problem for a transitional generation. Assuming that there is an asset whichdiscounts the present value of an income flow, which is positively related to the pathof capital, then a surprise reform will generate unexpected capital gains. We considerwhether the taxation of these extraordinary capital gains could raise enough revenueto fully compensate the transitional generation. An OLG model is presented withland, both as a store of value and a factor of production. In principal, the capital gainseffect can be sufficient to generate windfall revenue for a Pareto-improving reform,but in practice, for plausible parameterisations, is that it will increase its likelihood byreinforcing other mechanisms.