Pension sustainability and government effectiveness in the presence of population aging

Abstract

This study investigates the nonlinear effect of population aging on pension sustainability, contingent on perceived government effectiveness. Analyzing heterogeneous panel data for 15 OECD economies over the period 2002–2019, our findings reveal nonlinear patterns and evolving dynamics over time. We find that the negative impact of population aging on pension sustainability intensifies significantly as government effectiveness diminishes, indicating that the manner in which government policies are implemented and managed significantly influences how effectively pension systems can cope with the challenges posed by population aging. Thus, enhanced government effectiveness can facilitate a smoother transition for pension systems, ensuring their sustainability and supportiveness for retirees despite demographic shifts. Our findings highlight the importance of improving governance practices and policy implementation strategies in the face of population aging.