Long-Run Biological Interest Rate for Pay-As-You-Go Pensions in Advanced and Developing Countries

April 26, 2017

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Masahiro Nozaki. Long-Run Biological Interest Rate for Pay-As-You-Go Pensions in Advanced and Developing Countries, (USA: International Monetary Fund, 2017) accessed December 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

How much of an internal rate of return would a sustainable pay-as-you-go pension system offer current and future generations equally? The answer is the sum of the Long-Run Biological Interest Rates (LBIR), the real-world equivalent of Samuelson’s (1958) biological interest rate, and future productivity growth. Reflecting global population ageing, the median LBIR across 172 countries is as low as 1 percent per year. The LBIRs are particularly low in advanced countries, estimated to be negative in many of them, and require ample financial reserves today or future productivity growth to maintain participation in pension schemes. On the other hand, the LBIRs in less developed regions, such as in sub-Saharan Africa, are relatively high, indicating a potential to use a pay-as-you-go scheme to expand the coverage of public pensions. Raising the retirement age by five years brings up the LBIR by 40 basis points, significantly improving the long-run budget constraint of a pension scheme.

Subject: Aging, Expenditure, Labor, Pension spending, Pensions, Population and demographics, Production, Productivity, Retirement

Keywords: Aging, Contribution rate, East Africa, Europe, Internal rate of return, LBIR estimate, LBIR level, Life expectancy, Median LBIR, Medium-fertility variant, Middle East, North Africa, Pay-as-you-go pension, Pension reform, Pension spending, Pensions, Productivity, Rate of return, RCR decrease, Replacement rate, Retirement, Sub-Saharan Africa, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/098
Stock No:

WPIEA2017098
ISBN:

9781475595826
ISSN:

1018-5941

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