Coping with Spain's Aging: Retirement Rules and Incentives

53 Pages Posted: 25 Jun 2007

See all articles by Mario Catalán

Mario Catalán

International Monetary Fund (IMF)

Jaime Guajardo

International Monetary Fund (IMF)

Alexander W. Hoffmaister

International Monetary Fund (IMF) - Research Department

Date Written: May 2007

Abstract

This paper evaluates the macroeconomic and welfare effects of extending the averaging period used to calculate pension benefits in a pay-as-you-go system. It also examines the complementarities between reforms extending the averaging period and those increasing the retirement age under alternative tax policies. The analysis is based on a model in the Auerbach-Kotlikoff tradition applied to the Spanish economy. Without reforms, the simulations suggest that aging-related spending as a share of output will increase 16 percentage points by 2050, which are twice as much as in European Commission (2006) projections due to general equilibrium effects. Also, reforms extending the averaging period to the entire work life limit expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy (4 percentage points of GDP). These reforms and pre-funding the demographic shock mitigate the adverse macroeconomic effects of aging and improve welfare.

Suggested Citation

Catalán, Mario and Guajardo, Jaime and Hoffmaister, Alexander W., Coping with Spain's Aging: Retirement Rules and Incentives (May 2007). IMF Working Paper No. 07/122, Available at SSRN: https://ssrn.com/abstract=995623

Mario Catalán (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jaime Guajardo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander W. Hoffmaister

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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