By Giam Pietro Cipriani and Francesco Pascucci
We set up an overlapping generations model with endogenous fertility to study pensions policies in an ageing economy. We show that an increasing life expectancy may not be detrimental for the economy or the pension system itself. On the other hand, conventional policy measures, such as increasing the retirement age or changing the social security contribution rate could have undesired general equilibrium effects. In particular, both policies decrease capital per worker and might have negative effects on the fertility rate, thus exacerbating population ageing.
This paper is a perfect illustration of how general equilibrium effects can be very important and even deliver very counter-intuitive results if you were conditioned by partial equilibrium results. Will this convince policymakers?