Population Aging, Pension Systems, and Economic Growth: Applying an Overlapping Generations Model to the Informal Sector

Abstract

This paper analyzes the effects of an unfunded pension system on economic growth using an extended overlapping generations model to include the informal sector. Emerging countries usually have a more significant informal sector than advanced ones. The findings based on the Thai economy data suggest that an increase in unfunded pension payouts and the noncontributory old-age allowance induces lower output and changes the consumption profiles of the workers. Furthermore, it reduces households’ incentives to save and provide labor, especially among formal workers, which lowers the physical capital stock in the new steady state.