Dynamic model of pension reform

This paper examines the effects of demographic changes on financing the current public pension plans. The author compares the Czech situation with those of OECD countries; some simulations are presented for the Czech Republic. He suggests that funded systems serve much better during periods of rapid demographic changes. The paper builds a general equilibrium model for the Czech Republic and demonstrates the long-term effects of a pension plan switch. The initial model, based on the approach of Auerbach and Kotlikoff, is briefly described and the author's adaptations are then discussed. The model yields an assessment of welfare gains that would accrue during a shift of the public pension system. The author estimates that production would increase by about 6 %, investment would reach 25 %, or 28 % of GDP, and labour supply would decrease by 2-3 %. The capital stock. would increase substantially, by about 35 %, and the interest rate would fall correspondingly. Wages are estimated to increase in line with GDP; however, net wages would increase much more rapidly. These results have proved robust against changes in the author's baseline assumptions.