Pension Reform in Taiwan: the Path to Long-Run Sustainability

This paper quantifies the fiscal costs of different pension reforms in Taiwan that achieve long-run sustainability. We build a general equilibrium life-cycle model with endogenous labor supply in both intensive and extensive margins, consumption, saving, and benefit claiming. Several options to make pensions sustainable under current demographic changes are presented; increase income tax by 5.4 percent, increase the consumption tax by 6.2 percent, increase the pension tax by 9 percent, or reduce the pension benefits by 23.5 percent. Furthermore, we evaluate the changes in macroeconomic indicators as well as labor market outcomes under different reforms. Last, we highlight the importance of the general equilibrium effects that can account for endogenously saving and labor supply, as partial equilibrium analysis usually underestimates negative effects.