Modelling pensions balance under macro-economic scenarios

Abstract

The pension system brings challenges in many developed countries. While the systems were set up at a time of economic growth, policymakers are facing both economic slowdown and an aging population. Moreover, there is an incentive mis-match between short to medium term popularity and re-election versus taking necessary decisions to affect long-term sustainability of the system. In a small open economy, the situation is further accentuated by high volatility driven by migrations and cross-border workers. This paper aims to address the policymakers' challenges in these economies by providing both a highly innovative modelling that considers not only population aging but also the cohort of cross border workers and their entitlement to a partial pension in the future. It also provides an approach to analyse issues at stake and remove decision biases faced by politicians through policy options and their impact under various economic scenarios. We illustrate this approach through the case of Luxembourg and its pension challenge at horizon 2060 under three highly plausible scenarios: the "Successful economic reorientation", the "Progressive convergence to normal", and the "Perfect storm".