privatization of its six largest state enterprises to set up a pension fund and provide a flat pension for everyone. The fund is managed by two intemational fund managers selected through competitive bidding on administrative costs.

* Reduce evasion and increase coverage. This can only provide a temporary financing source, however.

## _Use_ **_general taxation and borrowing_**

- Cut other public expenditures to build a budget surplus, which can be used to cover the financing gap.

- Issue general treasure debt to cover the remaining cash gap in the short run.

- Pay off explicit pension debt through taxation.

Source: based on James 1999.

# **CGE framework and its advantages**

There has been a great deal of academic interest in analyzing and evaluating pension reform policies quantitatively. M. Feldstein (1974) pioneered the use of mathematical tools for describing aggregate capital accumulation in a social security system. Thomas J. Sargent and his colleagues (1995) used a rational expectation model to examine the impact of pension fund system. Laurence Seidman (1986), Patricio Arrau (1990), Laurence Kotilkoff (1997) and many others have advanced significantly the study of pension systems in recent years. The World Bank has developed a user-friendly computer program to calculate the effects of pension fund collection based on an actuarial model (Pension Reform Options Simulation Toolkit, PROST). While their research has provided important theoretical guidelines in this area, there have been repeated calls for more quantitative studies on social security to assist in the design of reform strategies.

Many quantitative studies in the past have relied on partial equilibrium analysis. For example, prices and wages were assumed as fixed: changes in the pension system would have no effect on the price level of products and input materials, no effect on the wage level of workers, no effect on the labor supply and demand, no effect on the structure of the economy and so on. In addition, these studies did not investigate the substitution effects between products and factors, nor did they consider the subsequent intersectoral reactions.

The Computable General Equilibrium model (CGE), which incorporates the fundamental general equilibrium links among production structure, pattern of demand, and incomes of various groups of households, has been widely used for economic policy analysis. Recent literature indicates a rapidly growing interest in these models. For instance, CGE models have been used to analyze the effects of various trade policies (J. Shoven and Whalley 1992), tax and fiscal policies (J. Piggott 1985), energy policies (T. Kehoe, 1992), and so on. Ayse Imrohoroglu, S. Imrohoroglu, and Duglas Joines (1992) used the CGE model to conduct a life cycle analysis of the U.S. social security system.

Employing the CGE model to analyze the impact of pension reform has the following advantages: First, the CGE model offers theoretical consistency. It can be thought of an incorporating particular specifications of production and demand functions in the well-known Arrow-Debreu general equilibrium framework. An economy wide consistency check can be performed by means of Walras' Law. Second, CGE models impose accounting consistency. A CGE model usually builds on a closed accounting system such as a social accounting matrix, which details all the basic identities for the 13