Understanding pension reforms

Many current pension systems experience a situation where groups with a lower socioeconomic status are inadvertently subsidizing the benefits of groups with a higher socioeconomic status due to differences in life  expectancy. While there are pension reforms that aim to reduce such inequalities, decision makers need a deep understanding of how pension reforms affect different socioeconomic groups and how people respond to these changes, to ensure that future policies are both fair and sustainable.

IIASA researchers explored the complexities of pension reforms using models that account for behavioral feedback and the diverse socioeconomic backgrounds of individuals. Applying the model to the Austrian economy and demography, they examined six pension reforms designed to either enhance the system’s sustainability or reduce the unfairness caused by the increasing gap in life expectancy across socioeconomic groups. Through simulations of proposed reforms such as adjustments to pension replacement rates and retirement age delays, the study uncovered multifaceted effects on labor supply, intergenerational equity, and welfare.

Notably, reforms aimed at sustainability often exacerbate differences between socioeconomic groups, highlighting the tradeoffs inherent in pension policy design.

The study highlights the importance of evaluating pension reforms in various dimensions and that understanding the behavioral responses to such reforms is critical for policies that ensure fairness and sustainability.