infonet-economy

This paper investigates the political feasibility of different hypothetical reform options of an unsustainable pay-as-you-go public pension system. In calibrating the model to the Swiss economy, we find that low internal rates of return and high distortions can reduce political support for an increase in earmarked taxes, up to a point where a reduction in the size of the social security program receives a majority of votes. Our simulations show that the consideration of non-social security taxes is crucial in welfare analysis. This is especially true for countries in which the public pension system is explicitly or implicitly subsidized.