Preventing reforming unequally

Abstract

Population aging has forced policy makers in most developed countries to reform pension systems with the aim of maintaining or re-establishing financial sustainability. This usually involves cost-cutting measures like later pension eligibility ages and lower replacement rates. Such reforms face harsh trade-offs with the objective of providing adequate pensions. Social welfare and inequality have emerged as crucial concerns about recent pension reforms, stressing that the lack of “social sustainability” may undermine financial sustainability. This paper analyzes such trade-offs and may explain why support for pension reform has dwindled in Europe. The paper evaluates reform effects on financial sustainability, social welfare, and intra- and inter-generational equality in a rich unified framework with several dimensions of heterogeneity and various behavioral reactions. Our simulations shed light on the complex distributional effects of pension reform on different cohorts and societal groups. They show where policy tends to reform unequally and why reforms may fail to find voters’ approval.