Public or Private Orientation of Pension Systems in the Light of the Recent Financial Crisis

This paper studies the appropriateness of a public or private orientation of pension systems in the light of the recent financial crisis, which has underscored the difficulties and contradictions associated with each system. The different institutional arrangements, in which public or private pension systems are embedded, are key components when assessing their responses to the crisis. Particularly, private pension systems are intertwined with financial markets, while social insurance-based pension systems are linked to the labour market mechanisms. This paper compares the British and French pension systems, as “archetypes” of private-oriented and public-oriented systems, respectively, the first relying on the market and private pension schemes, and the second on mandatory social insurance. This paper shows that the crisis has upheld the founding principles of the public (French) and private (British) pension systems to maintain the existing institutional configurations. At the same time, both systems have strengthened the role played by means-tested benefits and minimum pensions for low-income groups to offset the weaknesses of one or the other system, as emphasised by the crisis.     

Illiquid life annuities

In this paper, we consider illiquid life annuity contracts and show that they may be preferred to those illustrated by Yaari. In an overlapping generations economy, liquid life annuities are demanded only if the equilibrium is dynamically inefficient. However, an equilibrium displaying a positive demand for illiquid life annuities is indeed efficient. In this latter case, the welfare at steady state is larger if illiquid life annuity contracts are available.     

How can transportation policies affect growth? A theoretical analysis of the long-term effects of alternative mobility systems

We present an example of how public policies affect the evolution of the economy by influencing consumption habits, life styles and work attitudes. In particular, we show that governments can boost long-run growth by moving public investment away from collective transportation systems and towards infrastructures necessary for using private vehicles. Indeed, by augmenting the relative convenience of using private mobility systems, which are those more costly for the households, the government induces them to increase their labour supply so as to afford larger expenditures in transportation. This has long-term welfare implications depending also on the negative externalities associated with transport.     

人口预期寿命与退休年龄

人口寿命的不断延长给中国养老事业带来越来越大的压力.文章在两期交叠世代模型的基础上引入退休,在市场完全竞争、充分就业和政府能够控制退休年龄的假设前提下,在个人、企业和政府的行为以及资本市场均衡的层面构建了一般均衡的模型框架,从社会计划者的角度发现福利最大化下的人口预期寿命变化和退休年龄是正相关的,并呈现出负反比例的函数形式.文章还基于参数估计和赋值模拟的方法,求解出了人口预期寿命与退休年龄的调整算法,并以此给出了两者间的调整对照表.根据计算的结果和预期的寿命,建议2030年前逐步将退休年龄延长至65岁.最后通过检验发现,如果不存在人口预期寿命和退休年龄之间的调整机制,在保持养老金收支平衡的前提下,预期寿命的延长将减少养老金的发放,并可能带来社会福利的损失.因此,在中国人口预期寿命不断延长的背景下,建议政府考虑建立人口预期寿命和退休年龄的调整机制.     

Refundable Annuities (Annuity Options)

Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g., income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any  adverse-selection . In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new financial instrument,  refundable annuities  with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust their optimum consumption plan to different realizations. Refundable annuities are shown to be equivalent to  annuity options , that is, options that, if exercised, enable the purchase of annuities later in life at a predetermined price. Holding a variety of refundable annuities is ( ex ante ) welfare enhancing.     

Reforming occupational pension schemes: the case of the Netherlands

In many countries, occupational plans are being reformed away from defined-benefit (DB) to defined-contribution (DC) designs. This paper explores the case of the Netherlands, which features a particularly high ratio of occupational pension assets to GDP. Dutch occupational DB plans suffer from a number of serious weaknesses, including ambiguous ownership of assets, back-loading of benefits, and lack of tailor-made risk management. To address these weaknesses, we propose collective individual DC plans that are actuarially fair. These schemes maintain important strengths of collective schemes, such as mandatory saving, collective procurement, and pooling of biometric risks. At the same time, they eliminate intergenerational conflicts about risk management and distribution through transparent individual property rights on financial assets and tailor-made risk profiles in individual accounts. We show how the transitional burden due to phasing out the back-loading of pension benefits can be addressed without a substantial increase in contributions.     

ENDOGENOUS HEALTH CARE, LIFE EXPECTANCY AND ECONOMIC GROWTH

We study the endogenous relationship between health care, life expectancy and output in a neoclassical growth model. Although health care directly diverts resources away from goods production, it prolongs life expectancy, which in turn leads to higher savings and, hence, capital formation through a private annuity market. We show that savings and health care are complements in equilibrium, with both rising with economic development. Our model is therefore consistent with several observed stylized development patterns across countries. Moreover, through the longevity-enhancing channel, health care and health production technology are found by simulation to be growth and welfare promoting.     

Policy effects on transitional welfare in an overlapping generations model: A pay-as-you-go pension reconsidered

We study the welfare effects of a pay-as-you-go (PAYG) pension system in transition, as well as in the steady state, by showing how the total welfare effects are determined by a cumulative effect on capital. Theoretical studies have shown that the introduction of a PAYG pension system reduces steady-state welfare under dynamic efficiency. Nevertheless, such pension systems have been widely adopted in the real world. To explain this, we algebraically and graphically prove that the PAYG pension system could be Pareto-improving in transition under dynamic efficiency. Similarly, it is acknowledged that this pension system should be introduced under dynamic inefficiency because it improves steady-state welfare. However, we show that the PAYG pension system may be Pareto-deteriorating in transition. Our findings imply that governments adopt PAYG pension systems to achieve policy targets other than long-run welfare maximization.     

Optimum and Risk-Class Pricing of Annuities

When information on longevity (survival functions) is unknown early in life, individuals have an interest in insuring themselves against moving into different 'risk-classes' as their life expectancy is revealed. The First-Best allocation involves transfers across states of nature. With symmetric information, competitive equilibrium separates different risk classes and cannot provide such transfers because insurance firms are unable to precommit . When utility is invariant to risk-class realisation, the optimum entails uniform consumption and optimum retirement age independent of risk-class and an optimum social security scheme is superior to competitive equilibrium. When preferences depend on risk-class, welfare ranking of systems becomes indeterminate.     

基础养老金全国统筹收入再分配给付水平及适度性检验

依据生存公平和劳动公平统一原理,从基础养老金计发办法及规则分解入手,设定相应的全国统筹计发方案并分析不同方案对高低收入地区的财富分配的影响,同时从宏观适度性、微观适度性以及福利改进角度对基础养老金全国统筹各方案进行评价和适度性检验。利用地区间物价差异修正后的全国统筹计发方案,既可以解决劳动力跨统筹范围流转的难题,实现养老保险的地区间收入再分配和地区间基础养老金给付水平适度性的优化,也可在适度区间标准上实现福利改进。     

Ageing and unused capacity in Europe: is there an early retirement trap?

We address the issue of how early retirement may interact with limited use of financial markets in producing financial hardship later in life, when some risks (such as long-term care) are not insured. We argue that the presence of financially attractive early retirement schemes in a world of imperfect financial and insurance markets can lead to an 'early retirement trap'. Indeed, Europe witnesses many (early) retired individuals in financial distress. In our analysis we use data on 10 European countries, which differ in their pension and welfare systems, in prevailing retirement age and in households' access to financial markets. We find evidence that an early retirement trap exists, particularly in some Southern and Central European countries: people who retired early in life are more likely to be in financial hardship in the long run. Our analysis implies that governments should stop making early retirement attractive, let retirees go back to work, improve access to financial markets and make sure long-term care problems are adequately insured.
— Viola Angelini, Agar Brugiavini and Guglielmo Weber     

Health investment, saving, and public policy

Abstract.  This paper develops an overlapping‐generations model in which agents invest in health to prolong life in both working and retirement periods. It explores how unfunded social security with or without health subsidies affects life expectancy, economic growth, and welfare. In particular, by extending life at a possible cost of capital accumulation, health subsidies and a pay‐as‐you‐go pension can improve welfare, especially in the short run. JEL classification: I12, J14, J18, O11     

On the Fairness of Early-Retirement Provisions

Abstract. A crucial parameter for increasing the retirement age is the early-retirement discount of the public pension system. Critics of the present German system argue that the downward adjustment of the pension for early retirees is too small compared with a 'fair' system and thus encourages early retirement. We discuss several notions of 'fairness' of early-retirement provisions and propose a concept called 'distributive neutrality', which states that the ratio between total benefits and total contributions should not depend systematically on the individual's ability. By applying this concept to the German retirement benefit formula and taking empirically estimated relationships between annual income (as a proxy for ability), life expectancy and retirement age into account, we show that at the present discount rate of 3.6% per year there is redistribution from low to high earners, which, surprisingly, could be attenuated by raising the discount rate.     

Pension Reform during the Demographic Transition

The aim of this paper is to quantify the welfare effects of some currently discussed pension reform proposals in Germany. The analysis is based on an extended overlapping-generations model which accounts for intra-generational heterogeneity, rising life expectancy and declining fertility. Given a baseline path of the economy under the existing unfunded pension system, the model calculates the macroeconomic impact as well as the distributional and efficiency effects of various pension reform measures aimed at reducing the level of the future unfunded pension system. Simulations reveal that pension reforms cannot be evaluated solely in terms of inter- and intra-generational equity. Substantial efficiency gains or losses might arise if the linkage between contributions and benefits is improved or weakened.     

On the optimal design of pension systems

The present paper aims to quantify efficiency properties of flat and earnings-related pay-as-you-go financed social security systems of various institutional designs in order to identify an optimal pension design. Starting from a benchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as distortions of labor supply versus the benefits from insurance provision against income and lifespan uncertainty. Our findings suggest an optimal replacement rate of about 50 % of average earnings. In our model a single-tier earnings-related pension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form. We also show that the negative correlation between pension progressivity and pension generosity of real-world social security systems can be justified on efficiency grounds. Finally, our results indicate a positive impact of means-testing flat benefits against earnings-related benefits within multi-pillar pension systems.     

Unreformed or Hybrid? Accounting for Pension Arrangements Diversity in the EU

EU27 pension systems are diverse and different from textbook ideal-type. They are hybrids because they combine public and private pension features. Over a century, public and private pensions have been designed and reformed simultaneously. We examine how the history of those reforms can explain the emergence of existing hybrid pension arrangements.     

The extension of social security coverage in developing countries

We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risks. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.     

Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared

Annuities promise to play an increasingly important role in countries with national defined contribution retirement systems. In this article we examine life annuities in two countries, Singapore and Australia, each of which has a national mandatory pension program. Exploiting data on annuity pricing and purchase behaviour, we compare the money's worth of life annuity products across these two nations. Our results indicate that, after controlling on administrative loadings, there are important differences in measured adverse selection. Part of the explanation may be due to the different structures of the two countries’retirement systems.     

The Design of Pension Pay Out Options When the Health Status during Retirement Is Uncertain

This paper examines the optimal design of pension plans when the health status during retirement is uncertain. Assuming that the health status affects both life expectancy and the marginal utility of consumption, choice between a lump-sum payment and an annuity can be welfare-enhancing if the health status is not observable by pension plan providers. This result holds if the marginal utility of consumption and life expectancy are negatively correlated. On equity grounds, a lump-sum option can be justified even if the marginal utility of consumption is independent of life expectancy.     

Negotiation over Intellectual Property Rights Protection in a Mixed Market

This article models a North–South negotiation under a mixed oligopolistic setting where a public firm in the South and a private firm from the North compete in the southern market. The southern firm is a public one whose objective is a weighted sum of the South's social welfare and its own profit, whereas the northern firm is a pure profit maximizer. The North provides a quid pro quo in exchange for the strengthening of the enforcement of intellectual property rights (IPR) protection in the South. We show that when the northern and southern firms engage in quantity competition in the southern market, the southern government's optimal choice is either complete protection or complete violation. We show this to depend on the southern government's valuation of the quid pro quo. Moreover, strengthening IPR protection will deepen the privatization process in the South, though it brings about a social welfare loss to the South.