Quantifying the role of alternative pension reforms on the Austrian economy

This paper investigates the role of recent pension reforms for the development of the social security system and economic growth in Austria. We use a computable general equilibrium model that is built up of overlapping generations that differ by their household structure, longevity, educational attainment, and capital accumulation. Each household optimally decides over its consumption paths, work effort, and retirement age according to the life-cycle theory of labor, while they face survival risk. We find that the pension reforms implemented from 2000 to 2004, although in the correct direction, are not sufficient to solve the labor market distortion caused by the Austrian PAYG pension system. Using alternative policy options, our simulations indicate that a change to a notional defined contribution system and an increase in the educational distribution of the work force would increase the incentive for later retirement ages and thereby increase labor supply and economic growth. The authors would like to thank Christian Keuschnigg, Bernhard Hammer, Anne Goujon, Elke Loichinger, Ramon Bauer, the seminar participants at Aging and Productivity Workshop in St. Gallen, and two referees for valuable comments and help on data collection. Also, we would like to express our indebtedness to Ronald Lee, Carl Boe, and Carl Mason for their assistance in our computations. The authors acknowledge funding from the Austrian Science Fund (FWF) under project number I347-G16 and the Max Planck Institute for Demographic Research (MPIDR). ∗Principal corresponding author Email address: [email protected] (Miguel Sánchez-Romero) Preprint submitted to Labour Economics August 19, 2012