Diego Wachs, Jorge Onrubia Fernández
In response to population ageing, many countries have adopted automatic adjustment mechanism reforms that link retirement to life expectancy. Despite their benefits, there is limited research about non-fiscal consequences of these mechanisms. In addition, there is uncertainty about the extent to which an increase in life expectancy signals a capacity of individuals to remain active in the workforce. In this paper, we used an overlapping generations model to analyse the effects of such reforms over fiscal sustainability, adequacy, and fairness of public pension systems. We looked at three scenarios defined by the mechanisms indexing retirement age: a constant pensions fiscal balance, constant life expectancy after retirement, and constant disability-free life expectancy after retirement. Growth is exogenous in our standard model; however, we explore an alternative model with endogenous productivity partially determined by the age structure of the population. We illustrate the dynamics of our model by applying it to Argentina’s public pension system. Our results show that linking retirement to life expectancy would not be enough to restrict the projected growth in the pension system’s deficit. We also find that changes in productivity have limited effect on pension indicators, although the indexation system can amplify or buffer such effects.
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