Choosing a Pension Reform : A Framework for the Social Planner

This chapter investigates the issue of which reform of the pay-as-you-go pension system a social planner should choose given its aversion to inter-generational inequality and its discount rate of the welfare of future generations. For this purpose, an applied normative economics methodology is develops which uses as a starting point the results of a dynamic general equilibrium model with overlapping generations (GE-OLG). This model simulates the economic impact of different PAYG pension reforms in the United States, Japan, France and Germany.It shows that a social planner can hardly decide for one pension reform or another on the exclusive basis of the GDP criterion (except in the case of tax hikes balancing the regime which have sizable detrimental effects on the growth rate).Taking account of the inter-generational redistributive effects of the reforms thus becomes crucial for the social planner because it allows for discriminating between different possible scenarios. Freezing the age of retirement in an aging context triggers strong inter-generational redistributive effects, whereas reforms incorporating a rise in the average age of retirement limit strongly these inter-generational redistributive influences. However, in the four countries considered here, no pension reform is found to be Pareto-improving. Compared to a no-reform, baseline tax hikes scenario, PAYG pension reforms weigh down more or less on the inter-temporal welfare of the baby-boomers and increase the welfare of their children and of future generations.Social welfare functionals encapsulating a variable degree of aversion to inter-generational inequality and a variable discount rate of the welfare of future generations show that the social planner in the United States and Japan is likely to favor reforms bolstering private savings at unchanged age of retirement. In Germany and France, the social choice favors scenarios increasing the age of retirement. In all countries, the status quo corresponding to tax hikes balancing the pension regime characterizes a social planner with rawlsian preferences