A Parametric Reform of the Spanish Public Pension System

Abstract

I consider a theory based on households that differ in their education, receive an uninsurable, idiosyncratic endowment of efficiency labor units, and face health and survival risks. Households also understand the link between the payroll taxes they pay and the public pensions that they receive, and decide when to retire from the labor force. I calibrate this theory to the Spanish economy so that it replicates its demographic features, its macroeconomic aggregates and ratios, the Lorenz curves of its income and earnings distributions, and many of its institutional features. I show that this theory accounts for the retirement behavior of Spanish households almost exactly. I then use the model economy to study the aggregate, distributional, retirement and welfare consequences of increasing the number of years of contributions that are used to compute the pensions, and I evaluate this policy reform in the context of both the Spanish demographic and educational transitions. I find that the reform increases the stock of capital by 6.3 percent, and output by 1.6 percent, but it decreases consumption per capita by 2.6 percent. The average pension decreases by more than 19 percent, and the average retirement age from 61.9 to 60.9 years. The reform also reduces the Social Security deficit from 8.6 to 5.4 percent of GDP in the year 2050. Finally, I find that the welfare loss for the population alive at the moment of the reform is 2.5 percent of lifetime consumption. JEL CLASS.: C68, J26, H55

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