Published online by Cambridge University Press: 30 May 2016
Replacing the pay-as-you-go defined benefit (PAYG DB) system with an at least partially funded defined contribution (DC) system generates fiscal costs that need financing. The fiscal closures at hand differ by the channel and the extent of distortions. The main contribution of this paper is a thorough comparison of the welfare effects of the various fiscal closures of the pension system reform. In addition, we decompose the welfare effects to the parts attributable to changing the way pensions are financed (PAYG ⇒ prefunding) and to changing the way pensions are computed (DB ⇒ DC). We show that depending on the fiscal closure, the welfare effects differ substantially for the same pension system reform. The financing of the the pension system gap with public debt allows more intergenerational redistribution.
The authors would like to thank Marcin Bielecki, Agnieszka Borowska, and Karolina Goraus for wonderful research assistance. The authors are grateful to Hans Fehr, Fabian Kindermann, Lukasz Drozd, Borys Grochulski, Jaromir Nosal, and Jacek Suda, as well as two anonymous referees, for insightful suggestions. The paper benefited greatly from the comments of the participants of the VID Workshop in Vienna (2013), the Netspar Workshop in Amsterdam (2014), SNDE in New York (2014), ISCEF in Paris (2014), and ICMAIF in Rethymnon (2014). The support of the National Center for Science (Grant UMO-2011/01/D/HS4/04039) is gratefully acknowledged. The usual disclaimer applies.