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Coping with Spain's aging: retirement rules and incentives*

Published online by Cambridge University Press:  09 October 2009

MARIO CATALÁN ,
JAIME GUAJARDO  and
ALEXANDER W. HOFFMAISTER
MARIO CATALÁN
Affiliation:
International Monetary Fund (e-mail: mcatalan@imf.org)
JAIME GUAJARDO
Affiliation:
International Monetary Fund (e-mail: jguajardo@imf.org)
ALEXANDER W. HOFFMAISTER
Affiliation:
International Monetary Fund (e-mail: ahoffmaister@imf.org)
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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 applies a model in the Auerbach-Kotlikoff tradition to the Spanish economy. Extending the averaging period to the entire work life maximizes long-run welfare and limits expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy. Moreover, during the demographic transition, pension reforms induce intertemporal labor substitution effects that engender aggregate labor cycles.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 4 , October 2010 , pp. 549 - 581
Copyright
Copyright © Cambridge University Press 2009

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