Public Pension Reforms and Fiscal Foresight: Narrative Evidence and Aggregate Implications

Bi, Huixin; Zubairy, Sarah

doi:10.18651/RWP2020-06

Working Paper

Public Pension Reforms and Fiscal Foresight: Narrative Evidence and Aggregate Implications

Abstract: We explore the evolution of pension policy across countries and investigate the macroeconomic effects of pension structural reforms in recent decades, in particular those with implementation delays. We first document chronological changes in pension policy for 10 OECD countries between 1962 and 2017. The new data set shows that pension systems rapidly expanded between the 1960s and 1980s, followed by a wave of retrenchments since the 1990s. Structural pension reforms, which are motivated by long-run fiscal sustainability concerns, often come with significant implementation delays. We find that when structural pension retrenchments are implemented without delays, people close to retirement stay in the workforce longer to compensate for the decline in their pensions, leading to a decline in old-age pension spending. News about structural pension retrenchments in the future, however, leads people close to retirement to exit the labor market prior to the reform being implemented. As a result, government spending on old-age pensions tends to increase, rather than decrease, over the medium term. This effect is particularly prevalent for pension reforms that change retirement age and contribution years and that come with longer implementation delays.

Keywords: Fiscal foresight; Pension reform; Narrative approach;

JEL Classification: E62; H3; H55;

https://doi.org/10.18651/RWP2020-06