This project – together with the Peterson Institute of International Economics – takes the productivity slowdown during the past decades and its direct effects on wages and interest rates as given. From this somewhat pessimistic perspective, we analyze how pension systems will be affected. Key questions are whether declining wage growth and capital returns in the wake of declining productivity growth will undermine the financial sustainability of pension systems and/or the adequacy of pensions as an important social program.
The first part of the project uses the PENSIM simulation model to compute the quantitative impacts of a stylized productivity slowdown on the level of pension-benefit income for retirees and the balanced-budget contribution rates for workers. These trajectories serve as indicators of the financial situation of a pension system and the adequacy of pension benefits. The second part of the project is concerned with policy actions. While we do not cover policy actions that mitigate the causes of the productivity decline, we will analyze five types of adaptation based on increasing the quantity of labor and capital in order to offset the lower than previously expected value of labor and capital precipitated by the productivity slowdown.
A first version of the paper has been presented at the Peterson Institute in November 2017.