The problem of the sustainability of pay-as-you-go systems is becoming a serious concern for developing countries characterised by rapid demographic transitions and this problem will grow exponentially if nothing is done in the near future. Tunisia is a good example since its pension system has been in deficit since 2000 for the public sector fund and 2002 for the private one. According to the Tunisian National Statistical Institute (2009), the share of retirees in the population will increase from 10% in 2010 to 20% in 2034 due to the rapid ageing of the population. The increase in the dependency rate puts a heavy pressure on the financial viability of the social security system. This issue is becoming highly sensitive in the Tunisian public debate.
This paper develops an overlapping general equilibrium framework to capture the interactions among pension reform, labour market and inter-generational distribution issues in Tunisia. The impact on the labour market is addressed at the aggregate level but also by distinguishing different age categories. The three reform scenarios implemented to reduce the social security deficit consist in increasing social security contributions, reducing the replacement rate and postponing the retirement age.
The main result obtained is that increasing contribution rates is the worst solution in terms of welfare and unemployment, particularly for the youth. The best option is postponing the retirement age. Contrary to the traditional wisdom, it does not entail an increase of youth unemployment. For the two scenarios where aggregate welfare increases, the middle -aged are those that benefit the most from the reforms.