Pension Reform in Brazil: Transitional Issues in a Model with Endogenous Labor Supply

Abstract

Brazilian PAYG system has been under financial stress and needs to be reformed. A computational general equilibrium model with 55 overlapping generations is used to simulate macroeconomic and welfare impacts of alternative social security reforms. Transition turns out to have quite different redistributional effects for the generations involved depending on which tax is used to finance it. There is no unanimity about which transitional tax path maximizes individual welfare. I study potential voting results if generations choose between the PAYG and a set of transitional schemes.

The extension of social security coverage in developing countries

“…The capital income tax rate is chosen at 20%. The proportional consumption tax rate is around 15% which is close to the one reported in Ferreira (2005). In the model, either consumption tax , formal sector labor income tax, or capital income tax adjust to balance the government budget every period.…”

“…It is smaller than 5.06% of GDP reported in Ferreira (2005) because this number includes the social assistance program.…”

“…According to Ferreira (2005) the average annual population growth rate over the last 20 years from 1980 to 2000 is 1.79%. We therefore pick a growth rate n = 0.018 resulting in m = 1.5631 children per individual in the model.…”

“…In Brazil, total tax revenue is about 30% of GDP in 1998, with social security tax revenue contributing almost 5% (see Ferreira (2005)). We calibrate tax rates to match this size of government.…”

Macroeconomic implications of early retirement in the public sector: The case of Brazil

“…He finds large welfare gains from social security reform. Ferreira (2005) studies the redistributional effect of social security reform along the transition in Brazil. Glomm et al (2006) study the macroeconomic effects of generous public sector pensions, concentrating on opportunity costs of foregone public education expenditure and infrastructure investment.…”