DYNAMIC-MODEL OF PENSION REFORM

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