Future Pension Balances : Aging Patterns and Potential Pension Reforms in Republic of Korea and Hungary

Abstract

We investigate the sustainability of pension systems in the context of aging societies and significant intergenerational imbalances in the age pyramid. Using concrete examples and a general equilibrium model with infinitely optimizing agents, we simulate that the aging pattern of an economy matters for the pension balance and that the necessary policy responses and incentives depend on this. We consider a country with a very rapid and sustained aging trajectory, Korea, and by contrast, a country with a slow, steady aging trajectory, Hungary as an example. We use the median version of the UN population projection (United Nations, 2024) for the values of future population ratios and model how dynamic changes in population ratios and certain parametric pension reforms affect the sustainability of the country's pension balance to GDP ratio from present till 2080. Our results show that in Korea, a pension reform driven by a gradual increase in the official retirement age combined with an increase in pension contributions is unavoidable, while in Hungary, given the already high tax and contribution rates on labor, it is mainly the increase in the retirement age that could make the biggest contribution to improving the pension balance.