A Discussion on Pension Systems in Small Open Economies: Optimizing Pension Systems Under the Constraint of Policy Makers’ Objectives From the Perspective of a Small Open Economy

Abstract

This paper discusses what is the optimal pension system from the perspective of a small openeconomy. The discussion takes place within the context of the following policy objectives:minimizing labor market distortions, optimizing taxation, optimizing saving levels, riskmitigation, redistribution, and sustainability. It finds that a funded system is superior in thefollow aspects: it is does not distort the labor market and it is more sustainable. An unfundedpension is superior in mitigating risk and decreasing inequality through redistribution. Taxationcannot be optimized a priori and should be optimized in line with policy makers’ objectives.Savings decisions are significantly influenced by irrational behavior and other factors thatviolate the assumption of rational individuals; therefore, pension policies must take this intoconsideration