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Redesigning pension systems: The institutional structure of pension systems should follow population developments – Marek Góra – IZA World of Labor 2019

7 February, 2020

For decades, pension systems have been based on the increase in income generated by growing populations (the so-called demographic dividend). As changes in longevity and fertility rates have given rise to new population structures, this dividend has disappeared, but pension systems have not adapted. They have remained solvent by increasing redistribution to retirees from a declining workforce.

Key findings

Pros

  1. Pension reform can improve social equality by balancing the interests of workers and retirees.
  2. By lowering labor costs, pension reform can reduce barriers to incorporation into the labor market.
  3. Pension reform can reduce tax distortions that discourage job creation.
  4. By reducing subsidies to the pension system, reform can improve public finances.
  5. Greater transparency in institutions can lead to more rational decisions concerning savings, work and family.

Cons

  1. Pension reform faces political obstacles due to opposition from those who are about to retire or have recently retired.
  2. The strong tendency to make the same choices as in the past, ignores changes in conditions.
  3. The complexity of the pension system makes it difficult to see the need for reform and to assess its merits.
  4. If reforms involve financial markets, positive and negative externalities may arise.
  5. Accounting applied to contributions originating in pension systems, misleads and tempts politicians to hide the true scale of indebtedness.

To download this study, please click on this link.

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