Edited by Toshiaki Tachibanaki
Henry J. Aaron and Benjamin H. Harris* 1. INTRODUCTION Governments in most developed countries face serious problems in ﬁnancing their public pension programs. Falling fertility and mortality rates are pushing up the costs of government-managed pension programs, none of which has built up full reserves. The problem is widely perceived as one of population ageing, which is certainly one legitimate way of viewing the situation. But the problem can equally well be interpreted as a result of legislative intent. In every case, pension laws could have been drafted to avoid these problems. The most obvious way would have been to build up full actuarial reserves.1 Such funding could have boosted national saving and productive capacity, but it would not have lowered the shift of real resources from active to inactive members of the population. Legislatures elected not to build such reserves for what, at the time, seemed to be good and suﬃcient reasons. Alternatively, plans could have been drafted with automatic adjustment provisions that would have forestalled the emergence of deﬁcits and the need to amend pension laws to maintain ﬁnancial balance. Had such adjustment provisions been enacted in the past, they might have reduced the current political divisiveness associated with pension reform. But they would not have reduced the cost of providing the elderly and disabled with a given standard of living. In fact, such automatic adjustment provisions might well have forestalled desirable debate about changes in pension structure now occurring in many countries, a debate that...
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