PUBLIC PENSION SUSTAINABILITY OPTIONS: THE RELATIVE MERITS OF INCREASING CONTRIBUTION RATES OR SWITCHING TO A FULLY-FUNDED PENSION DISCUSSION PAPER #108 Public Pension Sustainability Options: The Relative Merits of Increasing Contribution Rates or Switchi

Many nations are experiencing population aging due to rising life expectancies and declines in fertility. As a result, policymakers are struggling with the sustainability of public pension systems. This paper uses an overlapping generations dynamic equilibrium model to investigate the relative merits of two pension sustainability options. The first option involves increasing the pension contribution rates of workers to ensure sustainability of the typical pay-as-you-go pension system. The second option is the switch to a fully-funded plan, in which the government is required to incur debt to honour existing pension liabilities, with individuals making contributions into the new fully-funded pension system when working, but also paying income taxes to service government debt. The timing of this switch coincides with the baby boom generation entering the old worker stage of life which is consistent with the timing of the current pension reform debate. Simulation results suggest that economies facing no population growth in the future and without technological progress are not better off switching to a fully-funded pension system