Pension systems revisited in the age of automation and an aging economy

Abstract

This study analyzes the impact of aging — an increase in longevity or a decrease in fertility rates — on pension benefits in an economy that incorporates automation capital in the production process. Across all three pension schemes—pay as you go, fully funded, and modified fully funded, we observe that the impact of increasing longevity is more pronounced than that of a decreasing fertility rate. Specifically, our analyses indicate that while increasing longevity consistently has a negative impact on pension benefits under all pension schemes, the impact of a decreasing fertility rate varies according to the pension scheme. Additionally, based on the common observation across all pension schemes that low-skilled households are vulnerable to the impacts of aging, we explore redistributive policies to improve the welfare of these households, and our findings indicate that the policy that leads to Pareto improvement can vary depending on the main driver of demographic transitions.