Macroeconomic effects of pension reforms in the context of aging populations: overlapping generations model simulations for Tunisia

Abstract

We have developed a general equilibrium overlapping generations’ model to evaluate the effects of demographic transition in Tunisia and to discuss the impacts of pension reforms. Simulations consider two scenarios: a benchmark scenario (without reforms) and a policy-change scenario, including a set of pension reforms: contribution rate increase, pensions’ level reduction, rise of the retirement age and finally the introduction of a complementary fully funded system. The latter incorporates a specific hypothesis consisting in differentiated returns for free saving (private) and compulsory (pension funds). Simulation results indicate that population aging could have a major impact on the saving rate, factors prices and economic growth. However, they also indicate that policy reforms could reduce the negative effects.

Keywords:

• pay-as-you-go system
• funded pension
• aging population
• overlapping generations

JEL classification:

• D91
• H55
• J26

Notes

1. Our simulations considered 2005 as the base year, for this reason, our retrospective analysis of the pension system stops this year.

2. Even though closed economy characteristic of the model prevents the evaluation of international effect of pension reforms, it is most likely a reasonably credible illustration of most countries given that the aging process is widespread: all countries will face similar demographic trends. Nevertheless, as the transition will not happen so perfectly synchronous, we consider the case of a small open economy in Section 5.

3. In sensitivity analysis, we have changed this form of utility function to take into account various values of inter-temporel elasticity of substitution.

4. When a variable is independent of the agent birth date, it is not indexed.

5. There may be another procedure in which a pension is paid monthly throughout the period of retirement.

6. is the rate of return on retirement saving. In simulations we will distinguish three possible cases: higher, lower or equal to r_t.

7. The model was solved by using general algebraic modeling system.

8. The selected values for model parameters and the results of the calibration are reported in the appendix.

9. The value found joined the econometric estimates made for Tunisia.

10. Population projection, 2004–2034. INS, June 2007.

11. For the year 2039–2050.

12. http://esa.un.org/unpop/.

13. From 2055 to 2060.

14. To our knowledge, there is not a CGEM-OLG on these reforms that has been applied in Tunisia.

15. The interest rate for pension saving, r^c is considered exogenous.

16. In the baseline scenario the initial contribution rate is 14.4% then it passes sequentially to 14.1%, 16.2% and 19.4% while the rate with increasing age of retirement is around 11.4% initially (because of reduced retiree and increased workers) then takes the following values: 11.1%, 12.7% and 15.3%.

17. These rates are still lower than those of the baseline.

18. Crowding out effect decreases here total savings so this frees a certain proportion of income that will be dedicated for consumption.

19. We recall that the criterion of analysis is the impact on economic growth and on financial situation of PAYG pension plan.

20. This scenario is better in terms of physical capital accumulation.

21. The results reported in the case of a small open economy depend heavily on certain assumptions in this scenario including: perfect capital mobility, the world is able to absorb all capital movements caused by the demographic transition and the world interest rate is not influenced by the aging population.

22. It is obvious that the balance of capital flows of a country is influenced by many factors (fiscal and monetary policy, controls on capital movements, differences in rates of capital taxation practiced by various countries) so that the results presented here should be regarded as reflecting a very hypothetical possibility. Nevertheless, the simulation identifies the pressures that could carry the ageing population.

23. Debts reach unsustainable values: B/GDP = 1.06993529 in 2040.

24. is the inverse of the inter-temporal elasticity of substitution.