Pension Reform in Russia: A General Equilibrium Approach

This paper uses a classic, overlapping generation model to analyze the optimal transition of the Russian economy from a PAYG pension system to a funded pension system. The transition is associated with the accumulation of social capital gained by increased contributions to the pension system. The analysis of the two-period model defines the optimal rule for the choice of the present value of the pension package as a function of aggregate capital stock in the economy. In the numerical simulation, the large-scale dynamic model of the Russian economy is used to compare the welfare efficiency of three transition scenarios. All the scenarios assume that the economy shifts from a steady state with a PAYG pension system to a steady state with funded pensions though the speed of transition differs among the scenarios. The analysis suggests that transition to a funded pension system produces social welfare gains and allows one to choose the efficient transition trajectory. However, Pareto-improving transition is not achievable in the model since some age cohorts have to pay greater contributions to the pension system in order to initiate the accumulation of social capital.