Pension Reform and Growth

44 Pages Posted: 20 Apr 2016

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Klaus Schmidt-Hebbel

Central Bank of Chile

Date Written: June 1995

Abstract

Replacing a pay-as-you-go pension system with a fully funded scheme could eliminate the incentives (under the pay-as-you-go system) to informalize production and employment. Simulations of an endogenous-growth model suggest that long-term growth could increase substantially by such a reform. Econometric evidence suggests that pension reform in Chile in 1981 may be a factor in the increase in Chile`s private savings since 1980.

Corsetti and Schmidt-Hebbel review the qualitative macroeconomic and welfare implications of replacing a pay-as-you-go pension system with a fully funded scheme.

They summarize the typically small effects found in the simulations literature, based on exogenous-growth one-sector models. Much larger, and sustained, effects are obtained in the framework of an overlapping-generations model with endogenous growth and formal-informal production sectors - the model presented in this paper.

Model simulations using the overlapping-generations model suggest that replacing a pay-as-you-go system with a fully funded system could substantially raise long-term growth rates by eliminating the incentives (under the pay-as-you-go system) to informalize production and employment.

A final look at Chile's reform experience suggests that a structural transformation toward formalization is taking place and that both private savings and growth have been rising substantially since 1980.

Econometric evidence suggests that Chile`s pension reform, in 1981, could be contributing toward Chile`s large increase in private savings.

This paper - a product of the Macroeconomics and Growth Division, Policy Research Department - is part of a larger effort in the department to understand macroeconomic and financial aspects of pension systems.

Suggested Citation

Corsetti, Giancarlo and Schmidt-Hebbel, Klaus, Pension Reform and Growth (June 1995). World Bank Policy Research Working Paper No. 1471. Available at SSRN: https://ssrn.com/abstract=604975

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
Italy
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Klaus Schmidt-Hebbel

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile
(56-2) 670-2386, 670-2586 (Phone)
(56-2) 670-2836 (Fax)

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