Author(s)

Yuan-Ho Hsu

Department of Economics/Graduate Institute of Political Economy, National Cheng Kung University, Tainan City.

This paper develops a multigenerational overlapping (OLG) model to investigate the welfare effects of pension reforms in an aging economy. Given the declining trend in the proportion of young people to the old aged, it is feared that existing pay-as-you-go pension system may not be sustainable and it necessitates higher tax or premium contributions to maintain the sustainability of the fiscal and pension system. This paper investigates the effects of four reform programs aiming to enhance the sustainability of the pension system. The programs are: (a) an increase in pension contribution, (b) a reduction in pension benefit, (c) an extension of mandatory retirement age, and (d) a combination of program (b) and (c). Policy simulation results from this paper indicate that extending mandatory retirement age harms only little of the current generations’ lifetime utility whereas it gradually improves future generations’ life time utility. On the contrary, increase in pension contribution reduces lifetime utility of the current generation without benefitting future generation. Alternately increase in contribution ratio improves future GDP growth whereas reducing replacement ratio cannot. Finally, an increase in pension contribution worsens government budgetary condition whereas reducing replacement ratio does not.

Population Aging, Pension Reform, Overlapping Generation, CGE Model

Hsu, Y. (2017) The Welfare Effects of Pension Reforms in an Aging Economy. American Journal of Industrial and Business Management, 7, 652-670. doi: 10.4236/ajibm.2017.75049.