Pension Unification, Recognition Bonds and Fiscal Sustainability in Ghana: A Dynamic General Equilibrium Approach

Abstract:

Ghana's National Pensions Act, 2008 (Act 766) established a three-tier contributory

pension system and mandated the unification of all existing public pension schemes

into this framework. Nearly two decades after enactment, the most significant legacy

scheme, Cap 30, a non-contributory defined-benefit arrangement covering well over

100,000 active workers and retirees across multiple security, intelligence, and judicial

institutions, remains outside the contributory system. This study develops a dynamic

general equilibrium model with overlapping generations to evaluate the fiscal,

macroeconomic, distributional, and political-economy implications of migrating legacy

public sector workers into Ghana's existing three-tier pension system.

The model is calibrated to Ghana's demographic structure, macroeconomic

aggregates, SSNIT administrative parameters, and Cap 30 scheme characteristics.

The transition is simulated through recognition bonds, explicit government debt

instruments that compensate legacy workers for accrued rights while crediting their

Tier 2 accounts. Seven reform scenarios are evaluated, varying the compensation

ratio (λ), the speed of migration, and the degree of age-based protection.

The simulation results support four principal findings. First, pension unification is

fiscally beneficial under all tested scenarios, with net fiscal improvements ranging from

0.37 to 0.42 percent of GDP per year and a cumulative debt-to-GDP improvement of

8 to 9 percentage points over a 20-year horizon relative to the no-reform baseline.

Second, unification alone cannot stabilise Ghana's debt trajectory: even under the

best-performing reform scenario, the debt-to-GDP ratio continues to rise from

approximately 62 percent to approximately 238 percent over 20 years, reflecting the

dominance of the structural primary deficit and real interest costs over pension reform

parameters. Third, the real government borrowing rate is the single most powerful

determinant of long-run debt sustainability, plausible variations in the real interest rate

generate a 289-percentage-point range in projected debt outcomes, dwarfing theeffects of all pension reform design parameters combined. Fourth, all working-age

cohorts benefit from unification through higher equilibrium wages, while retirees are

unaffected, confirming that the recognition bond mechanism successfully protects

accrued benefits.

The sensitivity analysis demonstrates that the compensation ratio has only a modest

effect on fiscal outcomes, a 50-percentage-point reduction in λ improves the debt ratio

at year 20 by only 1.3 percentage points, creating substantial fiscal space for

generosity in political negotiations with Cap 30 institutions. The study recommends

phased migration over five years, full recognition for workers within ten years of

retirement, and the embedding of pension unification within a broader fiscal

consolidation programme.

The paper contributes both methodologically and to policy. Methodologically, it

introduces the dynamic general equilibrium framework into Ghanaian pension policy

analysis, moving beyond the partial-equilibrium actuarial approaches that have

dominated previous discussions. For policy, it provides the quantitative evidence base,

net fiscal effects, cohort welfare estimates, compensation schedules, and robustness

analyses that are necessary to support a negotiated transition from Ghana's

fragmented legacy pension arrangements to the unified contributory system

envisioned by Act 766.