Abstract
In addition to the EPC announced labour market reforms described in sub-section 2.2 which impact on the underlying fundamentals of a country’s pension system, a large number of additional reforms are possible, with the following paragraphs confining themselves to an examination of firstly the implications of a parametric reform such as a reduction in the generosity of the PAYG pension system and secondly the effects of an increase in the effective retirement age up to the statutory age of 65. At the end of this section an attempt is also made to summarise the overall budgetary and growth effects of introducing a broad package of reforms, all of which will impact on the operation of the PAYG system. This final scenario combines the EPC’s labour market and generosity assumptions with an increase in the effective retirement age to 65 in order to see whether such a comprehensive overhaul of some of the key influences on the PAYG system would firstly be successful in stabilising the financial side of the public pension system, and secondly whether it would result in large gains in growth whilst simultaneously avoiding problems in terms of income distribution.
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Figures published by the European Commission (2000a) suggest that PAYG pensions represent roughly 89 per cent of all pensions in the EU, although the country variation is quite large, especially for countries such as the UK and the Netherlands which have a much higher proportion of private pension provision compared with the EU average and in fact have levels closer to those of the US.
In other words workers spent 3 years in employment for every year spent in retirement.
This assumption is crucial since in a separate simulation based on an “actuarially fair” adjustment of pensions to reflect the increased number of contribution years, the budgetary gain from an additional year of work falls from 0.84 of a percentage point of GDP to 0.6, while the GDP gain stays roughly the same as in the main simulation. The definition of “actuarially fair” used in this simulation is based on the assumption that in return for the extra five years of contributions that the generosity of one’s annual pension would increase by slightly less than 12 per cent relative to what it would otherwise have been but pensioners will receive this higher pension for, on average, five years less than in the central scenario. Consequently, while the fiscal gain is reduced it still remains relatively substantial.
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© 2004 Springer-Verlag Berlin Heidelberg
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Mc Morrow, K., Roeger, W. (2004). PAYG System: Economic Assessment of the Main Parametric / Labour Market Reform Options: What is needed to Bring the System Back into Equilibrium?. In: Welfens, P.J.J. (eds) The Economic and Financial Market Consequences of Global Ageing. European and Transatlantic Studies. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-24821-7_8
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DOI: https://doi.org/10.1007/978-3-540-24821-7_8
Publisher Name: Springer, Berlin, Heidelberg
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