Decades of increasing pension expenditures
The old PAYGO pension scheme was not sustainable with the expected increase in the share of elderly in the population, and 2011 marked the transition to a new system with flexible retirement age and strong incentives to postpone retirement. As we expect that future pension expenditures as a share of GDP will increase in the future, the relevance of the subject is significant.
Pensions can be controlled, demographics not
Statistics Norway (SSB) have estimated the future public pension expenditures in MOSART, which is a micro-simulation model. The model presents the expenditures as one number, based on the expected development in the representative sample and their demographic assumptions. A factor that MOSART does not account for is the uncertainty of this number. Surely the exact amount of public pension expenditures in 2050 is hard to predict, but how large is the uncertainty around the resolute that MOSART gives when we know that demographics cannot be controlled?
In trying to estimate the uncertainty of future public pension expenditures I will estimate a macro-model, where the demographic variables are stochastic. In the base year of 2010 I will calibrate my model against MOSART. When including stochastic demographic variables it is possible to analyze how the future population development will affect the estimated pension expenditures. As a result I hope my thesis will give estimates on the uncertainty of future pension expenditures and the significance of the demographic uncertainty in Norway.