We study the effects of pension reform on hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth in a four-period OLG model. The model explains important facts well for many OECD countries. Our simulation results prefer an intelligent pay-as-you-go system above a fully funded private system. Positive effects on employment and growth are the strongest when the pay-as-you-go system includes a tight link between individual labor income and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base

We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth, are all endogenous. Within each generation we distinguish individuals with high, medium or low ability to build human capital. This extension allows to investigate also the effects of pension reform on the income and welfare levels of different ability groups. Particular attention goes to the income at old-age and the welfare level of low-ability individuals. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and aggregate welfare, positive effects in a pay-as-you-go system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. Such a regime does, however, imply welfare losses for the current low-ability generations, and rising inequality in welfare. Complementing or replacing this 'intelligent' pay-as-you-go system by basic and/or minimum pension components is negative for aggregate welfare, employment and growth. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate.

We build and parameterize a general equilibrium OLG model that explains hours worked by three active generations, education by the young, the retirement decision of older workers, and aggregate per capita growth as functions of the level and structure of taxes and government expenditures. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks. To promote employment, especially among older workers, and economic growth, our results strongly prefer labor tax cuts targeted at older workers and higher productive government expenditures financed by a reduction of non-employment benefits and/or higher consumption taxes. We also evaluate the welfare effects for current and future generations of alternative policy changes

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