Reforming our pension system: Is it a demographic, financial or political problem?

Abstract

We argue that economic and demographic factors play a relatively small role in the old-age crisis; political factors are far more important. A benevolent social planner can address the problems raised by population ageing and declining productivity growth. However, in reality social security systems are established and reformed through the political process (majority voting and lobbying). Consequently, the outcome is likely not to be socially optimal. Majority voting typically results in overspending on social security, but also in rapidly phasing it out in case of unexpected shocks. Then, the entrenched interests of retirees that oppose drastic cuts in benefits can be socially desirable.