Pension reform during the demographic transition

The aim of this paper is to quantify the welfare effects of some currently discussed pension reform proposals in Germany. The analysis is based on an extended overlapping-generations model which accounts for intra-generationa l heterogeneity, rising life expectancy and declining fertility. Given a ba seline path of the economy under the existing unfunded pension system, the model calculates the macroeconomic impact as well as the distributional and efficiency effects of various pension reform measures aimed at reducing th e level of the future unfunded pension system. Simulations reveal that pens ion reforms cannot be evaluated solely in terms of inter- and intra-generat ional equity. Substantial efficiency gains or losses might arise if the lin kage between contributions and benefits is improved or weakened.