Analysing the association between pension funding and economic growth across the EU

Abstract

Population ageing and its repercussions on public finances poses a significant challenge in the European economic area. In fact, the provision of sustainable and adequate pensions is becoming a central area for policy setting, as the burden of ageing is forecasted to increase in the near future. A switch towards funded pension systems may be a potential solution to the issue of ageing, given that it leads to an increase in output. Therefore, the main aim of this dissertation is to analyse whether there is a positive and significant relationship between a change in the level of pension funding and economic growth, using a panel of 17 European countries, covering the period 2005-2019. The econometric model consists of a static, fixed effects model which attempts to represent the short run effects of changes in the degree of pension funding on economic growth. The main results conclude that in the scenario where the accumulation of pension assets leads to a delayed effect on economic growth, the relationship is positive and weakly significant. The discussion relates the weak significance in the results to the current fragmentation in the European area’s capital markets and speculates that the relationship may improve under a capital markets union. The dissertation emphasises the importance of prioritising policies which assist in the formation of the capital market union by the European Commission.