Coping with Spain’s Aging: Retirement Rules and Incentives

By Willy A Hoffmaister, Mario Catalan, Jaime Guajardo

May 1, 2007

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Willy A Hoffmaister, Mario Catalan, and Jaime Guajardo. Coping with Spain’s Aging: Retirement Rules and Incentives, (USA: International Monetary Fund, 2007) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 is based on a model in the Auerbach-Kotlikoff tradition applied to the Spanish economy. Without reforms, the simulations suggest that aging-related spending as a share of output will increase 16 percentage points by 2050, which are twice as much as in European Commission (2006) projections due to general equilibrium effects. Also, reforms extending the averaging period to the entire work life limit expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy (4 percentage points of GDP). These reforms and prefunding the demographic shock mitigate the adverse macroeconomic effects of aging and improve welfare.

Subject: Aging, Consumption taxes, Labor, Pension reform, Pension spending

Keywords: Labor force, Retirement age, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/122
Stock No:

WPIEA2007122
ISBN:

9781451866865
ISSN:

1018-5941

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