Skip to main content

Advertisement

SpringerLink
Log in

Ageing population and pension system sustainability: reforms and redistributive implications

  • Original Paper
  • Published:
Economia Politica Aims and scope Submit manuscript

Abstract

The paper presents an agent-based model developed to investigate the relationship between retirement age and pension system sustainability taking into account the redistributive implication. Moreover, we investigate the role that the government can play in reducing inequality by implementing debt stabilisation policies, as for example applying a property tax. Results show that delaying the retirement age is an effective policy to raise the pension scheme sustainability. However, there is an emerging trade-off between the pension system sustainability and the extension of the pension benefits that may have intergenerational implications. Pension reforms which reduce the pension age threshold or increase the paid benefit will rise the overall pension expenditure and will negatively affect the public debt evolution which may require some stabilisation measures, as the implementation of positive property taxation. The effects of the property taxation on the debt reduction and the level of equality in the population’s wealth distribution strongly depends on the progressivity of the measure and on the size of the taxpayer population involved. The analysis evidences the crucial role played by the age dependency ratio both in achieving the pension system sustainability and in assuring the wealth distribution within the population.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

Notes

  1. Aiming to cut the public expenditure, the Italian pension system has been reformed six times in the considered period by the following governments: Amato (1992–1993), Dini (1995–1996), Prodi (1996–1998), Berlusconi (2001–2005), Prodi (2006–2008) and Monti (2011–2013). On the contrary, Berlusconi reform of 2001 increased the pension expenditure reducing the age retirement threshold.

  2. See for example Conlisk (1980), Kirman (1992), Conlisk (1996), Duffy (2006), Delli Gatti et al. (2010), Hendry and Mizon (2010) or Coibion and Gorodnichenko (2015).

  3. For supporting results in empirical analyses see for example Frankel and Froot (1990) or Akerlof and Shiller (2009). For experimental analyses see Smith et al. (1988) or Hommes (2011).

  4. We define age dependency ratio the ratio between number of retired and active workers. This ratio is slightly different respect to the standard age dependency ratio because the worker population of the model is between 21 and 64 years old and not between 15 and 64 years old as the standard measure.

  5. See for example the different wealth taxes in Switzerland, France, Italy and Netherlands or the proposals in the fiscal policy agenda in Germany and US.

References

  • Aglietta, M., Chateau, J., Fayolle, J., Juillard, M., Le Cacheux, J., Le Garrec, G., et al. (2007). Pension reforms in Europe: An investigation with a computable OLG world model. Economic Modelling, 24(3), 481–505.

    Google Scholar 

  • Akerlof, G. J., & Shiller, R. J. (2009). Animal spirits: How human psychology drives the economy, and why it matters for global capitalism. Princeton: Princeton University Press.

    Google Scholar 

  • Assenza, T., & Delli Gatti, D. (2013). E pluribus unum: Macroeconomic modelling for multi-agent economies. Journal of Economic Dynamics and Control, 37(8), 1659–1682.

    Google Scholar 

  • Bach, S., Beznoska, M., & Steiner, V. (2011). A wealth tax on rich to bring down public debt? Revenue and distributional effects of a capital levy. Fiscal Studies, 35, 67–89.

    Google Scholar 

  • Bettendorf, L. J. H., & Heijdra, B. J. (2006). Population ageing and pension reform in a small open economy with non-traded goods. Journal of Economic Dynamics and Control, 30(12), 2389–2424.

    Google Scholar 

  • Bielecki, M., Goraus, K., Hagemejer, J., Makarski, K., & Tyrowicz, J. (2015). Small assumption (can) have a large bearing: Evaluating pension system reforms with OLG models. Economic Modelling, 48(C), 210–221.

    Google Scholar 

  • Bielecki, M., Goraus, K., Hagemejer, J., & Tyrowicz, J. (2016). Decreasing fertility vs increasing longevity: Raising the retirement age in the context of ageing processes. Economic Modelling, 52, 125–143.

    Google Scholar 

  • Blanchard, O. (1985). Debt, deficits, and finite horizons. Journal of Political Economy, 93, 223–247.

    Google Scholar 

  • Bonabeau, E. (2002). Agent-based modeling: Methods and techniques for simulating human systems. Proceedings of the National Academy of Sciences, 99(3), 7280–7287.

    Google Scholar 

  • Brinkman, J., Coen-Pirani, D., & Sieg, H. (2018). The political economy of municipal pension funding. American Economic Journal: Macroeconomics, 10(3), 215–246.

    Google Scholar 

  • Chen, Z., & Murata, T. (2010). Examination of possible progress of Japanese pension system using an agent-based model. In 2010 2nd International symposium on aware computing. Tainan (pp. 278–284)

  • Coibion, O., & Gorodnichenko, Y. (2015). Information rigidity and the expectations formation process: A simple framework and new facts. The American Economic Review, 105, 2644–2678.

    Google Scholar 

  • Conlisk, J. (1980). Costly optimizers versus cheap imitators. Journal of Economic Behaviour & Organization, 1(3), 275–293.

    Google Scholar 

  • Conlisk, J. (1996). Why bounded rationality? Journal of Economic Literature, 34(2), 669–700.

    Google Scholar 

  • Delli Gatti, D., Gaffeo, E., & Gallegati, M. (2010). Complex agent-based macroeconomics: A manifesto for a new paradigm. Journal of Economic Interaction and Coordination, 5(2), 111–35.

    Google Scholar 

  • Delli Gatti, D., Desiderio, S., Gaffeo, E., Cirillo, P., & Gallegati, M. (2011). Macroeconomics from the bottom-up (Vol. 1). Milan: Springer.

    Google Scholar 

  • Dolls, M., Doorley, K., Paulus, A., Schneider, H., Siegloch, S., & Sommer, E. (2017). Fiscal sustainability and demographic change: A micro-approach for 27 EU countries. International Tax and Public Finance, 24(4), 575–615.

    Google Scholar 

  • Duffy, J. (2006). Agent-based models and human subject experiments. In L. Tesfetsion & K. L. Judd (Eds.), Handbook of computational economics, volume 2: Agent-based computational economics. Amsterdam: North-Holland.

    Google Scholar 

  • Fougère, M., & Mérette, M. (1999). Population ageing and economic growth in seven OECD countries. Economic Modelling, 16, 411–427.

    Google Scholar 

  • Frankel, J., & Froot, K. (1990). Chartist, fundamentalist and trading in the foreign exchange market. American Economic Review, 80, 181–185.

    Google Scholar 

  • Galasso, V. (2008). Postponing retirement: The political effect of aging. Journal of Public Economics, 92, 2157–2169.

    Google Scholar 

  • Godinez-Olivares, H., Boardo-Penas, M., & Haberman, S. (2016). Optimal strategies for pay-as-you-go pension finance: A sustainability framework. Insurance: Mathematics and Economics, 69(C), 117–126.

    Google Scholar 

  • Guardiancich, I. (2012). Pension reforms in Central, Eastern and Southeastern Europe: From post-socialist transition to the global financial crisis. London: Routledge.

    Google Scholar 

  • Gustman, A., & Steinmeier, T. L. (2015). Effects of social security policies on benefit claiming, retirement and saving. Journal of Public Economics, 129(C), 51–62.

    Google Scholar 

  • Heijdra, B. J., & Ligthart, J. E. (2006). The macroeconomic dynamics of demographic shocks. Macroeconomic Dynamics, 10(3), 349–370.

    Google Scholar 

  • Helbing, D. (2012). Agent-based modeling. In D. Helbing (Ed.), Social self-organization. Understanding complex systems. Berlin: Springer.

    Google Scholar 

  • Hendry, D. & Mizon, G. (2010). On the mathematical basis of inter-temporal optimization. Discussion Paper 497, University of Oxford Department of Economics.

  • Hommes, C. (2011). The heterogeneous expectations hypothesis: Some evidence from the lab. Journal of Economic Dynamics and Control, 35(1), 1–24.

    Google Scholar 

  • Hommes, C. (2013). Behavioral rationality and heterogeneous expectations in complex economic systems. Cambridge: Cambridge University Press.

    Google Scholar 

  • Istituto Nazionele di Statistica, Life table (2017).

  • http://dati.istat.it/Index.aspx?DataSetCode=DCIS_MORTALITA1&Lang=en#. Accessed 01 Apr 2019.

  • Istituto Nazionele di Statistica, Popolazione residente al \(1^\circ \) Gennaio 2018 per età, sesso e stato civile Italia (2018). http://demo.istat.it/pop2018/index.html. Accessed 01 Apr 2019.

  • Lychkina, N. N. & Morozova, Y. A. (2015). Agent based modeling of pension system development processes. In 2015 SAI intelligent systems conference (pp. 857–862). IEEE.

  • Johansen, L. (1977). Lectures on macroeconomic planning. Part 1. General aspects. Amsterdam: North-Holland.

    Google Scholar 

  • Karam, P., Muir, D., Pereira, J., & Tuladhar, A. (2010). Macroeconomic effects of public pension reforms. IMF Working Papers, pp. 1–63.

  • Kilponen J, Kinnunen H, & Ripatti, A. (2006). Population ageing in a small open economy-some policy experiments with a tractable general equilibrium model. Bank of Finland Research Discussion Paper. (28).

  • Kiraly, B., & Simonovits, A. (2019). Learning to save in a voluntary pension system: Toward an agent-based model. Journal of Economic Interaction and Coordination, 14(1), 121–145.

    Google Scholar 

  • Kirman, A. (1992). Whom or what does the representative individual represent? The Journal of Economic Perspectives, 6(2), 117–136.

    Google Scholar 

  • Magnani, R. (2011). A general equilibrium evaluation of the sustainability of the new pension reforms in Italy. Research in Economics, 65, 5–35.

    Google Scholar 

  • Mazzocchetti, A., Raberto, M., Teglio, A., & Cincotti, S. (2018). Securitization and business cycle: An agent-based perspective. Industrial and Corporate Change, 27(6), 1091–1121.

    Google Scholar 

  • Meier, V., & Werding, M. (2010). Ageing and the welfare state: Securing sustainability. Oxford Review of Economic Policy, 26(4), 655–673.

    Google Scholar 

  • Miyazaki, K. (2014). The effects of the raising-the-official-pension-age policy in an overlapping generations economy. Economics Letters, 123, 329–332.

    Google Scholar 

  • Nielsen, S. (1994). Social security and foreign indebtedness in a small open economy. Open Economies Review, 5(1), 47–63.

    Google Scholar 

  • Pamp, O. (2015). Political preferences and the aging of populations: Political-economy explanations of pension reform. New York: Springer.

    Google Scholar 

  • Piketty, T., Saez, E., & Zucman, G. (2013). Rethinking capital and wealth taxation. Paris School of Economics, UC Berkeley und London School of Economics: Arbeitspapier.

  • Poghosyan, T. (2014). Long-run and short-run determinants of sovereign bond yields in advanced economies. Economic Systems, 38(1), 100–114.

    Google Scholar 

  • Sinn, H.-W., & Uebelmesser, S. (2002). Pensions and the path to gerontocracy in Germany. European Journal of Political Economy, 19, 153–158.

    Google Scholar 

  • Smith, V., Suchanek, G. L., & Williams, A. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5), 1119–1151.

    Google Scholar 

  • Tesfatsion, L. (2000). Agent-Based Computational Economics: A Brief Guide to the Literature, Working Paper, Iowa State University. Available on-line at: http://www.econ.iastate.edu/tesfatsi/ace.htm. Accessed 1 Mar 2020.

  • Thiemann, A., & Agundez Garcia, A. (2019). The budgetary and redistributive effects of wealth-related taxes. Science for policy briefs, Joint Research Centre, Fiscal Policy Analysis. https://ec.europa.eu/jrc/en/page/fairness-policy-briefs-series-182382#wealth-taxes. Accessed 2 Dec 2019.

  • World Bank. (2017). Population ages 65 and above (% of total). Staff estimates based on age/sex distributions of United Nations Population Division’s World Population Prospects: 2017 Revision. Accessed 01 Apr 2019.

Download references

Acknowledgements

In developing the ideas presented here, I have received helpful input from Francesco Menoncin, Sergio Vergalli, and the audience at the “Longevity Risk, Differential Mortality, and Lifetime Inequality” Workshop (University of Brescia, 2018). I am also grateful to Matilde Zubani for her comments on an earlier version of the manuscript. I thank the Associate Editor and the two anonymous referees. All the usual disclaimers apply.

Author information

Authors and Affiliations

  1. Dipartimento di Economia e Management, Università degli Studi di Brescia, Via San Faustino 74/b, 25122, Brescia, Italy

    Davide Bazzana

Authors
  1. Davide Bazzana
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Davide Bazzana.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix A

Appendix A

Table 4 Pension reforms definition and percentage variation in debt-output ratio and in 20/20 ratio comparing to the baseline scenario
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bazzana, D. Ageing population and pension system sustainability: reforms and redistributive implications. Econ Polit 37, 971–992 (2020). https://doi.org/10.1007/s40888-020-00183-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40888-020-00183-8

Keywords

JEL Classification

Search

Navigation