Anticipation effects of looming public-pension reforms

Abstract

In many countries, current unfunded public pension systems are unsustainable. Though agents recognize that fiscal imbalances will be eliminated sooner or later, the timing of reforms and future policy mixes are typically unknown. The paper proposes a tractable framework to study forthcoming but ill-specified events, such as a crisis in the pension system, within a macroeconomic model based on individual life-cycle optimization. The uncertainty about the timing of a future stabilization is modeled by a subjective hazard function where the state-dependent hazard rate depends on a measure of the public-pension system's expected net liabilities. Using Switzerland as a motivating example, the model is calibrated and simulated under a number of alternative policy options and different perception patterns. Expectations prior to a reform are shown to have large impacts on aggregate variables and on cross-generations profiles of consumption and labor supply. In comparison to well-specified pre-announced stabilization policies, timing uncertainty and misperceptions can lead to welfare losses, in particular for the middle-aged and the elderly.