Social Security Reforms in Heterogeneous Ageing Populations

Abstract

As populations age, government programs that redistribute resources from the working-age population to the dependent elderly are increasingly under fiscal pressure, requiring policy adjustments. At the same time, many of these government programs are also challenged because mortality differentials by socioeconomic status increase. If ex ante mortality differences are ignored in the contribution and benefit structure of government programs, a redistribution from short-to long-lived individuals will be the result and actuarial fairness may be violated.

In this chapter, we first review evidence of the increasing mortality differential by socioeconomic status (SES). Out of all elderly government programs, we focus on public pensions. We proceed by discussing the role of differential mortality on the internal rate of return (IRR) of the pension system and discuss how contributions and benefits would need to adjust to restore equality of the IRR among different socioeconomic groups. We continue discussing several potential future research topics related to the policy implementation of such reforms. First, an investigation of which SES variable to use in pension reforms to better account for mortality differentials would be required. Second, empirical studies on the variation of the IRR of pensions across SES groups are important for the new design of the parametric components of pension plans. Because individuals will react to public policy reforms, we also propose studying these policy reforms in behavioral models to account for general equilibrium effects, the transition costs of such reforms, and the possibility of using a multi-pillar approach.