Macroeconomic Implications of Population Ageing and Pension Reform in Romania

Project type: CERGE/GDN RRC X, 2010-2011

Project team:

• Ciprian Necula, PhD - coordinator
• Ionela Costica, PhD
• Gabriel Bobeica
• Elena Bojesteanu
• Alina Nicoleta Radu

Abstract

It is commonly acknowledged that the world is ageing rapidly. Pension systems need to be adjusted to the demographic developments and Romania is no exception. The Romanian government introduced a mandatory, fully funded, defined-contribution scheme, which became operational in 2008. The objective of the research proposal is to assess the macroeconomic effects of the Romanian pension reform. We employ an analytical framework consisting in a continuous time OLG model with agents facing a Gompertz-Makeham age-dependant mortality process. We extend the existing theoretical literature in several directions by allowing for endogenous growth through the accumulation of human capital and by considering three stages of life, namely a schooling period, a working period, and a retirement period. We further enrich the OLG framework by including a fully funded pension system, and by analyzing a pension reform consisting in a gradual transition from a PAYG pension system to a fully funded one. Although empirically we focus on the Romanian economy, the model can be easily calibrated to other countries facing a similar reform. The calibrated model will be employed to investigate the macroeconomic and the intergenerational welfare effects of demographic shocks (i.e. baby boom, increased longevity), other exogenous shocks or policy measures.

Summary of Findings

Completed Paper

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