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This is shown by the results of a study that recently appeared in the “Journal of Pension Economics and Finance”. “We are all getting older, but we age differently,” said population economist and co-author Alexia Fürnkranz-Prskawetz to the APA. This diversity, which the researchers were able to represent using a model, must be taken into account in reforms.
In a society in which education is particularly worthwhile for the individual, people will try to invest as much as possible in education. As a result, they earn better, pay into the pension system later and receive a pension for longer because they live longer on average, explained population economist and first author of the study, Miguel Sanchez-Romero, in a press release from the Vienna University of Technology (TU). This was often not taken into account, but can now be reflected using the model from the TU and the Austrian Academy of Sciences (ÖAW).
Social inequality increased
“With our model, we try to simulate decisions such as education, labor market participation or retirement over the life cycle of individuals,” says Fürnkranz-Prskawetz. These decisions are embedded in a macroeconomic “world” – because, it is assumed, every decision is influenced by socio-political circumstances, such as pension reforms. This is not represented in the model, as is usual, by individual representative actors, but by heterogeneous groups, Fürnkranz-Prskawetz continued.
“Heterogeneity is considered both within birth cohorts, such as individual differences in learning ability, and across cohorts,” Sanchez-Romero told APA. By taking into account historical population data from Austria, which extends from the end of the 19th century to the present day, the heterogeneity over the course of historical time can be simulated.
In addition, the good data situation serves as evidence over a long period of time: “We used the development of the educational groups over historical time to calibrate the model. Our model then allows corresponding other variables, for example in the pension sector, to be reproduced historically accurately,” says Fürnkranz -Prskawetz. The researchers therefore assume that the model also allows reliable forecasts.
Dealing with results is a political question
The impact of changes on the different cohorts was calculated for six different pension reforms. In terms of the financial sustainability of the pension system, increasing the retirement age would have the greatest effect, but at the same time it would increase social inequality, Fürnkranz-Prskawetz noted.
A pension reform that includes an adjustment factor for individual life expectancy compared to average life expectancy could in turn contribute to greater equality between the different groups. “The idea is not that the government should determine the life expectancy of each individual. But we show that differences in life expectancy can be well explained using existing data, such as pension points,” said Fürnkranz-Prskawetz.
How to deal with the results is a political question for which there is of course no clear mathematical answer, the economist added. However, it is important to her to note that a “one size fits all” solution for pensions cannot lead to fair results in an increasingly diverse society.
Some aspects of the study, especially the handling of historical data, are already being incorporated into the Fiscal Council’s long-term model, said the co-author of the study, Philip Schuster, who as an economist in the Fiscal Council’s office works on recommendations for politicians, told the APA. The findings on the complex consequences of any reform for different groups would also receive attention: “We have to reform the pension system, but if these differences are not taken into account, existing social inequalities could be exacerbated by pensions,” summarized Sanchez-Romero.
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