Fiscal Alternatives of Moving from Unfunded to Funded Pensions

Abstract

The reform of public pension systems has become a key policy issue in many countries. Because conventional approaches to reform largely unfunded retirement income schemes prove politically and economically difficult, attention has focused on the option of a partial shift towards funded provisions. Yet this too presents problems. This paper outlines the potential benefits of such a shift and highlights the main fiscal options and constraints. The liabilities to the current generation of retirees and workers under an unfunded pension scheme constitute a huge, hidden public debt. Most countries find that making this implicit debt fully explicit, repaying it and thus reversing the initial redistribution towards the start-up generation, lie beyond their political, economic and fiscal capacities. Thus, a shift requires simultaneous steps of the following sort: (i) a benefit reform of the unfunded scheme, reducing the implicit debt; (ii) a redesign of the basic tier remaining unfunded, to ...

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