Pension system reforms are a fashionable topic in industrialized countries, developing countries, and transition countries alike. Many countries consider partly replacing existing pay-as-you-go (PAYG) systems with fully-funded (FF) systems. It is hoped that such reforms increase labor market efficiency, spur domestic capital accumulation, and counteract rising dependency ratios, even though the theoretical and empirical evidence is ambiguous. These pension reforms have a potential impact on a country's saving-investment balance and thus on the current account. On the one side, a PAYG system is based on intergenerational transfers while a FF system is based on saving. On the other side, a pension reform involves costs that need to be financed. The net effect on the saving-investment balance - and hence the current account balance - depends on whether individuals are forward-looking or myopic, and on whether the reform is debt-financed or tax-financed. This paper illustrates possible effects of pension reforms on the private as well as the aggregate saving-investment balance
Bibliography
Includes bibliographical references (pages 27-29)
Notes
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