http://worldcat.org/entity/work/id/38307284

Pension Reform and Growth

June 1995 Replacing a pay-as-you-go pension system with a fully funded scheme could eliminate the incentives (under the pay-as-you-go system) to informalize production and employment. Simulations of an endogenous-growth model suggest that long-term growth could increase substantially by such a reform. Econometric evidence suggests that pension reform in Chile in 1981 may be a factor in the increase in Chile's private savings since 1980. Corsetti and Schmidt-Hebbel review the qualitative macroeconomic and welfare implications of replacing a pay-as-you-go pension system with a fully funded scheme. They summarize the typically small effects found in the simulations literature, based on exogenous-growth one-sector models. Much larger, and sustained, effects are obtained in the framework of an overlapping-generations model with endogenous growth and formal-informal production sectors--the model presented in this paper. Model simulations using the overlapping-generations model suggest that replacing a pay-as-you-go system with a fully funded system could substantially raise long-term growth rates by eliminating the incentives (under the pay-as-you-go system) to informalize production and employment. A final look at Chile's reform experience suggests that a structural transformation toward formalization is taking place and that both private savings and growth have been rising substantially since 1980. Econometric evidence suggests that Chile's pension reform, in 1981, could be contributing toward Chile's large increase in private savings. This paper--a product of the Macroeconomics and Growth Division, Policy Research Department--is part of a larger effort in the department to understand macroeconomic and financial aspects of pension systems.

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