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Previsión Obligatoria para Vejez y Crecimiento Económico

This paper provides an overview of the likely effects of the change towards a funded social security system on economic growth. The first section considers the effect of replacing a pay-as-you-go system on private saving, in an open economy with physycal capital and imperfect international capital mobility. Even though the first generation may benefit when introducing a pay-as-you-go system, it does so at the expense of reducing saving, the capital stock, and the speed of capital accumulation, all of which damages future generations.

When replacing the pay-as-you-go system with a funded one, the financing needs od the dying system can be reconciled with rebuilding the capital stock only if at least some portion of the new expenditure is not financed by asset sales or debt issues. Summing up, a movement towards a funded system may increase modestly the national savings rate, but if it does, the cumulative effect over 40 years is substantial.

The next section studies temporary effects on growth. On the one hand we find that reforming the social security system to stop subsidizing early retirement eliminates a distortion in the labour market and increases growth transitorily. On the other hand, we find that in Chile during 1981 – 1989 the growing pension funds triggered legal reforms to improve the capital market, each of which increased efficiency and caused temporary growth.

The third section considers institutional reform and improvement of the capital market as an externality of the growing pension fund, and concludes that this effect offers the opportunity to trigger an endogeneous growth process with permanent effects.