Welfare Effects of Pension Reforms

Policy makers around the world have implemented pension reforms – increasing statutory retirement ages and/or adjusting pension formulas – to ease the demographic burden on pay-as-you-go social security systems. Andreas Haller's paper provides a unifying framework to evaluate the welfare effects of pension reforms using a sufficient statistics approach. He shows that the welfare effects of any reform rest crucially on the "multiplier" – the total fiscal effect relative to the mechanical fiscal effect of a reform. Multipliers can be readily estimated with reduced-form methods using data on contributions to and transfers from the entire welfare state system. To illustrate his framework, he exploits a series of pension reforms in Austria. Andreas Haller finds that increasing the early retirement age has a multiplier of 0.4 to 0.7. By contrast, reducing pension generosity generates a multiplier of 1.4 to 1.7. In the Austrian context, he finds that reducing pension generosity is preferable to increasing the early retirement age to curb social security expenditures.