Social security and retirement incentives in Austria

This paper provides an overview of the interaction between social security and retirement behavior in Austria in the decades up to the on-going reform process. The key question is, how much of the retirement behavior can be attributed to incentive effects of the pension system. We describe the labor market and retirement behavior of the elderly in Austria, survey the key features of the public pension system and finally present the results of a series of simulations aimed at assessing the retirement incentives generated by the pension system. We compute levels and accrual rates of social security wealth and implicit tax rates on continued work according to the method portrayed in Gruber and Wise [Gruber J, Wise D (1999) Social security and retirement around the world. University of Chicago Press, Chicago London]. To some extent, the sharp drop in labor force participation among the elderly must be attributed to major disincentives of the Austrian pension system; the system turns out to provide significant incentives to retire early. Past reforms have reduced the disincentives. Our results, however, show the need to further reform the public pension scheme and to reorient it stronger towards the principle of actuarial fairness.     

Welfare Analysis of Pension Reforms in an Ageing Japan

This paper uses a computable general equilibrium model with overlapping generations to explore the effects of different public pension schemes on economic welfare, and intergenerational and intragenerational equity. Besides the benchmark case based on the 2004 public pension reform, the present paper considers two alternative reforms: financing the basic pension benefit through a consumption tax, and eliminating the earnings‐related pension benefit. The simulation results suggest that even the consumption‐tax financing of only the basic pension, namely, the combination of both reforms, might not improve overall economic welfare, although it increases economic output by inducing capital formation.     

Do pensions foster education? An empirical perspective

The paper examines the effect of population ageing on public education spending. On the one hand, ageing is expected to have a negative effect on education, as an increasing number of retirees results in ‘intergenerational conflict’ and, hence, the condemnation of education expenditure. On the other hand, ageing, in combination with pay-as-you-go pension systems, offers incentives for the working-age generation to invest in the public education of the young in order to ‘reap’ the benefits (that is, higher income tax/contributions) of their greater future productivity. Empirical evidence derived from the application of a fixed effects approach to panel data for OECD countries shows that the increasing share of elderly people has a non-linear effect on education spending. This indicates a certain degree of intergenerational conflict. Nevertheless, we find that future population ageing, which reinforces the mechanism linking public education and pensions, reflects positively on education expenditure. Furthermore, by disaggregating total education expenditure by educational levels, we observe that this effect is led by levels of non-compulsory education, probably as a reflection of the direct connection to labor productivity.     

Occupation pension for public employees in the People's Republic of China: A new approach with defined benefit underpin pension plan

The State Council of the People's Republic of China announced a reformed pension plan for public employees with the occupation pension plan in January 2015, officially disclosing that the social pension systems for private and public employees will be unified. Our proposed occupation pension plan for public employees is one of the important components in transiting from a dual‐track pension system to a sustainable and unified system. We aim at providing a pension design, that is, the defined benefit (DB ) underpin pension with estimates of the costs and benefits. We have used a financial engineering approach to calculate the hedge contribution for a DB underpin hybrid pension plan benefit. We also treat pension benefit and salaries in aggregate. Therefore, we propose a stochastic and exogenous salary model. Employees’ total benefits can be determined by multiple factors, such as inflation, economic environment, and employer's preference. However, the expectation of employees’ total benefits should not be affected by the change of salary and pension benefits. Our results could facilitate the ongoing pension reform in the People's Republic of China, providing a rigorous benchmark with public policy implications as to plan design, cost estimation, as well as risk management approach.     

A SAVINGS SUBSIDISATION SYSTEM IN A MODEL OF ENDOGENOUS FERTILITY AND ENDOGENOUS GROWTH: AN EXTENSION OF WIGGER (1999)

Population ageing is now an established demographic characteristic of many economies. Economists working in the endogenous growth theory tradition have sought to model the relationship between public pensions, financed on a 'Pay-As-You-Go' basis, and the growth in per capita incomes. The resultant intergenerational wealth redistribution from young to older people seems to decrease private savings, diminish capital accumulation, and lower the growth of per capita incomes. The underlying transmission mechanism appears to be a crowding out effect in private capital markets contingent upon the introduction of public pension systems. A growing literature exists on the interrelationships between public pension schemes, fertility rates and endogenous growth. Following Wigger's (1999) pioneering overlapping generations endogenous growth model, we extend this model to examine the effects of a savings subsidisation system on the rate of per capita income growth, fertility and voluntary intrafamily wealth transfers, where parents view children both as an insurance good and a consumption good. Moreover, children care about the consumption levels of their parents. An increase in contributions to a savings subsidised public pension scheme will crowd out private intergenerational transfers from the young to the old and thereby negate the usefulness of children as an insurance good.     

中国城镇养老保险制度改革的收入分配效应——基于2002年城镇住户调查数据的定量分析

Using the micro data of Urban Household Survey made by the National Bureau of Statistics of China(NBS) in 2002, this paper studies quantitatively the distributional effects of Public Pension Reform in urban China, from intragenerational and intergenerational perspectives, by measuring lifetime net benefits that urban employees obtain under the public pension system in 1997 and the newest one announced in December 2005, respectively. The results indicate that the regressive income transfer existing before implementation of the reform is improved as a consequence of the 1997 reform. However, the Act of 2005 Reform generates the obvious inclination of the regressive income transfer among people who exceed 40 years old in 2002. On the other hand, from the viewpoint of intergenerational distribution, the intergenerational inequality resulted from 1997 reform is greater than that from 2005 reform. Moreover, all generations would receive higher lifetime net benefits under the Act of 2005 Reform, but it must be based on sustainable pension system and participants’ full pension contribution during their duration of employment. __________ Translated from Jingji yanjiu 经济研究(Economic Research Journal), 2007, (3): 70–80, 91     

Beyond the Toledo agreement: the intergenerational impact of the Spanish Pension Reform

The paper examines the intergenerational impact of the Spanish public pension system after the 1997 Pension Reform Act. Within a Generational Accounting framework, we find that the new legal setting could leave future generations with liabilities as high as 176% of 1996 GDP. Hence, we analyse the impact of alternative reforms. Holding the pay-as-you-go setting, a further improvement to tax-benefit linkage in line with the Toledo Agreement proposals is shown to yield an intergenerationally more balanced outcome, than an increase in the retirement age or an expansion of public subsidies financed through indirect taxes. Finally, a move toward a partially funded pension system which restores the intergenerational balance is simulated.     

The Austrian Severance Pay Reform: Toward a Funded Pension Pillar

With the beginning of 2003 a new severance pay scheme was introduced in Austria. The reform extends the coverage of the scheme to all employees, and moves it to full and enterprise external funding, but average payments will be lower than previously. This paper provides some evidence on two explicit aims of the reform, namely to generate more fairness in the distribution of severance payments among employees and the creation of a basis of the underdeveloped second pillar of the Austrian pension system. The empirical analysis based on a cross section of completed job spells of different durations indicates that differences in payments among groups will be stronger in the new scheme compared to the old system. Based on retirement income projections and simulations of a multi-pillar pension reform for the blue and white collar workers’ pension system, we conclude that, an increase of the contribution rate would be necessary to achieve a sufficient second pillar retirement income. Helpful comments by Milan Vodopivec and an anonymous referee are gratefully acknowledged.     

Aging,Savings, and Public Pensions in Japan*

We analyze the impact of population aging on Japan's household savings rate and on its public pension system and the impact of that system on Japan's household savings rate and obtain the following results: first, the age structure of Japan's population can explain the level of, and past and future trends in, its household savings rate; second, the rapid aging of Japan's population is causing Japan's household savings rate to decline and this decline can be expected to continue; third, the pay‐as‐you‐go nature of the public pension system, combined with rapid population aging, created considerable intergenerational inequities and increased the savings rates of cohorts born after 1965, which in turn slowed the decline in Japan's household savings rate; and fourth, the 2004 public pension reform alleviated the intergenerational inequities of Japan's public pension system somewhat but will in the long run exacerbate the downward trend in Japan's household savings rate.     

Institutions for Fiscal Stability

This paper reviews the controversy over Europe's Stability andGrowth Pact and offers a proposal for its reform. It arguesthat Europe would be best served by focusing on the fundamentalcauses of unsustainable debts — public enterprises thatare too big to fail, unfunded public pension schemes that aretoo big to ignore, inefficient and costly labor market and socialwelfare problems, and budget making institutions that createcommon pool and free-rider problems — rather than on arbitrarynumerical indicators like whether the budget deficit is aboveor below 3 percent of GDP. It proposes defining an index ofinstitutional reform with, say, a point each for reform of budgetmaking arrangements, reform of public pension schemes, and reformof labor markets and unemployment insurance. Countries receivingthree points would be exempt from the Pact's numerical guidelines,since there is no reason to think that they will be prone tochronic deficits. The others, whose weak institutions renderthem susceptible to chronic deficits, would in contrast stillbe subject to its warnings, sanctions and fines.(JEL E0, F4)     

Shifting from pay-as-you-go to individual retirement accounts: A path to a sustainable pension system

With aging demographics and generous pension programs, the sustainability of the pay-as-you-go (PAYG) public pension system has been often questioned and has motivated policymakers to enact reforms in many countries. Although mandatory funded Individual Retirement Accounts (IRAs) appear to be a solution to this unsustainable system, existing reforms usually take place within the PAYG system by reducing pension benefits. This paper evaluates the effects of PAYG reforms as well as reforms that switch to the IRA system. Our analysis shows that PAYG reforms outperform IRA reforms in many aspects. In fact, PAYG reforms achieve higher GDP and yield higher welfare in the long run. The transition to the steady state is also found to be less volatile for PAYG reforms. While PAYG generally places a larger burden on future generations, the positive welfare effect of cross-subsidization dominates the welfare loss. Our findings may explain why pension reform is a controversial issue in most countries and why we rarely observe a shift to the IRA system.     

The fiscal outlook in Austria: an evaluation with Generational Accounts

During the next few decades the populations of most developed countries will grow older and older as a result of the low fertility rates since the 1970s and/or the continuously increasing life expectancy. Generational Accounting which was introduced in the early 1990s, can illustrate the effects of this ageing process on a country’s fiscal situation and on the intergenerational redistribution. Austria’s age dependency ratio will more than double over the next four decades in most official projections. In our paper we quantify for Austria how unsustainable its public finances are due to the demographic development. We show that despite recent reforms of the pension and health systems the demographic development produces a major problem for Austria’s coffers. Furthermore we compare our results to similar calculations for Germany and Switzerland.     

Why Sweden's pension reform was able to be successfully implemented

Governments that do not reform pay-as-you-go (PAYG) pension systems will eventually face a pension crisis. In a democracy, reforms require majority support. The problem is that pension reform requires today's generation to bear the burden to avoid burdening tomorrow's generation. Sweden recently passed pension legislation that specifies a gradual transition from a public defined-benefit plan to a defined contribution plan. Why was Sweden successful in reforming its pension system? We find that a political economy perspective helps to answer this question: there are more winners who would vote in favour of the reform than non-winners who would vote against it. When comparing the net effect (present value of expected benefits minus present value of remaining contributions) of the new and old systems, contributions of the working generation (age < 53) are reduced by more than their expected benefits.     

Endogenous retirement and public pension system reform in Spain

Population aging has spurred developed countries around the world to reform their PAYG pension systems. In particular, delaying legal retirement ages and reducing the generosity of pension benefits have been widely implemented changes. This paper assesses the potential success of these policies in the case of the Spanish economy, and compares them with the results obtained by the (rather modest) reforms already implemented in 1997 and 2001. This evaluation is accomplished in a heterogeneous-agent dynamic general equilibrium model where individuals can adjust their retirement ages in response to changes to the pension rules. We check the ability of the model to reproduce the basic stylized facts of retirement behavior (particularly the pattern of early retirement induced by minimum pensions). The model is then used to explore the impact of pension reforms. We find that already implemented changes actually increase the implicit liabilities of the system. In contrast, delaying the legal retirement age and extending the averaging period in the pension formula to cover most of the individual's life-cycle can reduce the implicit liabilities substantially. These findings reveal the failure of the Spanish political system to distribute the costs of population aging more evenly across the generations.     

关于缩小企业与机关事业单位养老金差距的研究述评

受养老保险制度"碎片化"影响,我国机关事业单位与企业的养老金存在较大差距且逐渐拉大,成为社会保障制度建设中不得不解决的问题。制度分割导致的养老金"双轨"运行,是导致企业与机关事业单位养老金待遇差距的主要原因。要缩小这种差距必须从改革模式和制度设计两方面入手。而公务员养老制度能否和事业单位一起改革、第二支柱养老保险能否真正发挥作用、养老保险改革是否会联动其他制度改革等问题,直接影响养老金制度改革的成败。     

Public Pension Programs in Southeast Asia: An Assessment

This paper assesses public pension programs in select Southeast Asian economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam – henceforth referred to as the SEA6) and the key issues facing them. The criteria used in assessing pension systems are the philosophy of pension design, the extent of coverage, investment policies and performance, and administrative and compliance costs. The paper argues that three broad reform directions to strengthen public pensions merit consideration. The first direction is to enhance the professionalism of the existing provident and pension fund organizations, including their governance practices. The second direction is to strengthen the role of noncontributory budget‐financed pensions (e.g. social pensions). The third is to adopt a systemic perspective to pension reform that includes reforms in complementary areas (labor markets, public financial management practices, and the civil service); developing a financing‐mix of pensions; and lastly, improving effective coverage by exploring complementarities between health care and pension programs.     

Voluntary participation and intergenerational risk sharing in a funded pension system

We explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary. Typically, the willingness of the young to participate depends on their belief about the future young's willingness to do so. We characterise equilibria with voluntary participation and show that the likelihood of their existence increases with risk aversion and financial market uncertainty. We find that mandatory participation is often necessary to sustain a funded pension pillar and to let participants benefit from intergenerational risk sharing.     

DEFINED CONTRIBUTION PLANS, DEFINED BENEFIT PLANS, AND THE ACCUMULATION OF RETIREMENT WEALTH

The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC plans depends on a participant's contribution behavior and on financial market returns, while accumulation in DB plans is sensitive to a participant's labor market experience and to plan parameters. This paper simulates the distribution of retirement wealth under representative DB and DC plans. It uses data from the Health and Retirement Study (HRS) to explore how asset returns, earnings histories, and retirement plan characteristics contribute to the variation in retirement wealth outcomes. We simulate DC plan accumulation by randomly assigning individuals a share of wages that they and their employer contribute to the plan. We consider several possible asset allocation strategies, with asset returns drawn from the historical return distribution. Our DB plan simulations draw earnings histories from the HRS, and randomly assign each individual a pension plan drawn from a sample of large private and public defined benefit plans. The simulations yield distributions of both DC and DB wealth at retirement. Average retirement wealth accruals under current DC plans exceed average accruals under private sector DB plans, although DC plans are also more likely to generate very low retirement wealth outcomes. The comparison of current DC plans with more generous public sector DB plans is less definitive, because public sector DB plans are more generous on average than their private sector DB counterparts.     

The Intergenerational State Education and Pensions

When credit markets to finance investment in human capital are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social arrangements. We show that public financing of education and public pensions can be designed to implement an intergenerational transfer scheme supporting the complete market allocation. Neither the public financing of education nor the pension scheme we consider resemble standard ones. In our mechanism, via the public education system, the young borrow from the middle aged to invest in human capital. They pay back the debt via a social security tax, the proceedings of which finance pension payments. When the complete market allocation is achieved, the rate of return implicit in this borrowing–lending scheme should equal the market rate of return.     

我国城镇养老保险体制改革中的激励机制问题

我国城镇养老保险体制虽然经历了数次改革,但是一直忽视了一个重要的问题,即激励机制问题,以致体系内资金缺口不断扩大,扩面、催缴工作举步为艰.职工和企业缺乏参与积极性的根本原因在于制度设计上的缺陷,即现行制度中"大锅饭"的成分太高:缴费的大部分用于再分配,个人帐户的比例太小并且是空帐,个人帐户回报率太低等.该文分析了目前的制度形成的原因和过程,在该制度下欠费、拒缴、抵制参与的必然性,并且讨论了建立合理的激励机制的思路,证明了在合理的机制下所需要的缴费大大低于目前制度下所要求的缴费水平.