Fiscal sustainability and universal pensions: Public pensions in Ecuador

This paper aims to assess the impacts of some pension reforms on the economic welfare and main macroeconomic variables in the Ecuadorian economy, where the goverment covers 40% of the benefits. We use an overlapping model, where two types of simulations are carried out for balancing the government’s budget: 1) income taxes and social security contributions; and 2) consumption taxes (value added tax, or VAT) that finance pensions, considering tax evasion as well. The simulations suggest that the elimination of the government’s financing of contributory pensions, along with a reduction of the replacement rate to50%, leads to a welfare gain of 15.8%, and an increase in steady-state GDP and private consumption of 13.5% and 6.4%, respectively. Results are even higher if VAT is used instead.