Fertility,Intra‐Generational Redistribution,and Social Security Sustainability

Incorporating heterogeneity in preference to having children into an overlapping generations model of a small open economy, we examine the effects of changes in the size of pay‐as‐you‐go (PAYG) social security on fertility choices of individuals and population growth of the economy. It is shown that PAYG social security will raise population growth by increasing the number of individuals who have children and the number of children parents have if the system involves redistribution between retirees with different contributions, whereas, if it has no redistribution, PAYG social security does not affect the fertility decisions of individuals.     

Pension Reform, Capital Markets and the Rate of Return

Abstract. This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre‐funding – for capital markets in Germany. We use a stylized closed‐economy, overlapping‐generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay‐as‐you‐go contribution rate and thus result in a larger funded component of the pension system. We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby‐boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.     

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.     

Globalization,Neoliberalism and the attack on social security

Neoliberal political movements advocate privatization of public pension systems. Globalization imposes pressure on nations to conform to neoliberal policy views with respect to the design and structure of social insurance, including public pension systems. The paper begins with an investigation of the economic, ethical and ideological dimensions of the privatization debates in the U.S.; it argues that privatization advocates may be largely moved by ideology, since the other reasons advanced appear weak or unfounded. The second part discusses the history of Social Security, the purposes for its creation, and some of its economic effects. Differences between public and private pension systems are considered. A brief international comparison of some aspects of public pension system finance and benefit structures is presented. The final section considers the ethical, macroeconomic and distributional implications of privatization, prefunding and payroll tax funding, and argues for a pay as you go system financed with income taxes. In order to promote equity, economic security, community, and social cohesion, public pension systems should be universal in coverage. In order to reduce the inequality, income insecurity, and aged poverty generated by market economies, public pension systems ought to be progressive: benefit/contribution ratios should be inversely proportional to income, and progressive income taxes should finance the system. To promote economic growth, the systems should be financed on a pay-as-you-go basis, and should not be prefunded except for an emergency reserve. The fiscal policy recommendations partially depend upon the theory developed by Abba Lerner in the 1940s, and recently advanced by Wynne Godley and Randy Wray: Lerner's “principle of functional finance.”     

Who cares about the day after tomorrow? Pension issues when households are myopic or time inconsistent

Pension economics has traditionally guided pension policy with the help of formal models based on individuals who think in a life‐cycle context with perfect foresight, full information, and in a time‐consistent manner. Associated macro models were mostly based on a single country. This paper sheds light on several aspects of pension economics when these assumptions do not hold using—to our knowledge—the first multi‐country model of procrastinating households. Our focus is on the interaction between the share of procrastinators in a country, the speed and extent of population aging, and the size of an existing PAYG‐DB pension system. Starting from the insight that procrastination reduces the volume of savings, we focus on three questions that are particularly relevant for the quickly aging Asian economies: What are the consequences for the balance between pay‐as‐you‐go and fully funded pension systems? Where will retirement savings be invested in a globally linked world with very different pension systems and demographics? How large are global spillover effects of pension reforms in one region for the other regions in the world?     

不同生育率情形下养老保险筹资模式比较研究

理论研究普遍认为,基金制养老保险筹资模式优于现收现付制,但这几乎都是基于人均资本视角的判断。本文在外生和内生生育率两种情形下,从福利经济学视角分析基金制是否完全优于现收现付制。理论模型表明,在一定参数组合下,无论外生生育率还是内生生育率,都存在使现收现付制下社会福利高于基金制下社会福利的养老保险缴费率。模型的数值模拟显示,存在使现收现付制下社会福利更高的养老保险缴费率,且在外生生育率下（符合我国生育政策）现收现付制缴费率在12%左右社会福利最高,内生生育率下（符合发达国家生育政策）现收现付制缴费率在6%左右社会福利最高。前一数值与已有研究成果观点相近(我国社会统筹部分缴费率应下降到15%左右),后一数值与美国（62%）、日本（77%）等发达国家现收现付制养老保险缴费率相近。稳健性检验显示,只要参数赋值在合理范围内,数值模拟主要结论不变。本文为降低现行我国社会统筹部分养老保险缴费率提供了理论借鉴。     

IDIOSYNCRATIC RISK,AGGREGATE RISK,AND THE WELFARE EFFECTS OF SOCIAL SECURITY

We ask whether a pay‐as‐you‐go financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We show that the whole welfare benefit from insurance against both risks is greater than the sum of benefits from insurance against the isolated risks. One reason is the convexity of the welfare gain. The other reason is a direct risk interaction amplifying the utility losses from risk. Our quantitative evaluation shows that introducing a minimum pension leads to sizeable welfare gains, despite substantial crowding out. About 60% of these gains would be missing from summing up the isolated benefits.     

现收现付制与人口老龄化关系定量分析

中国目前的养老保险和医疗保险实行的是基金积累制为主的筹资模式。按照有关文献的解释 ,这是因为中国正面临着人口迅速老龄化的压力 ,现收现付制不能有效应对人口老龄化 ,而基金积累制则不存在这一问题。本文构造了一个模型 ,详细分析了现收现付制与人口老龄化的关系 ,给出人口老龄化是否导致现收现付制发生支付危机的定量判别条件 ,并根据人口学相关理论和人口资料预测了 2 0 0 1— 2 0 60年中国人口老龄化趋势 ,从而检验了人口老龄化是否引发现收现付制的支付危机 ,同时给出了现收现付制度下养老金缴费率和人均养老金水平增长率的确定原则。     

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.     

Distributional Effects of Public Education in an Economy with Public Pensions*

We study how the allocation of government expenditures between two major outlays—education and pay‐as‐you‐go social security—affects human capital distribution in an economy with heterogeneous agents. We consider an overlapping generations economy where the government maintains both programs, and allocates tax revenues to finance them. In our model, human capital is one of the factors of production. It is itself produced as a combined result of public inputs and private inputs. Parents' decisions to invest time and material resources in education of their children are motivated by altruism, heterogeneous in its strength across the population, which leads to heterogeneity of incomes. We investigate the effect of an increase in public funding for education on the human capital distribution. We show that in this framework, contrary to some earlier results, increased spending on public education may lead to higher inequality. Our results depend crucially on the interaction of education funding with the social security budget and on the elasticity of substitution in the learning technology.     

How Well Does the Australian Aged Pension Provide Social Insurance?

Social security plays an essential role in an economy, but if designed incorrectly, it can distort individuals' labour supply and savings behaviour. We explore how well the Australian means‐tested pension system provides social insurance by changing the settings of the system and calculating the impact on welfare. In order to exclude trivial welfare gains, we keep the cost of the programmes constant. We find that the means‐tested pension system is welfare reducing, but does provide a better outcome than a PAYG system of equivalent cost. We also find that if the benefit amount is held constant, and hence the cost of the pension programme is allowed to vary, a taper rate of 1.0 is optimal. However, once we hold the cost of the programme constant, a universal benefit scheme provides the best welfare outcome.     

GROWTH AND WELFARE EFFECTS OF AN ENVIRONMENTAL TAX‐BASED PUBLIC PENSION REFORM*

This paper presents an overlapping generations model in which: (i) firms create emissions as by‐products of production; and (ii) tax revenue from the working young is transferred to the retired elderly as pay‐as‐you‐go pension benefits. The paper focuses on a replacement ratio, which measures the proportion of after tax work earnings replaced by the public pension, and considers a replacement ratio neutral reform in which the newly introduced environmental tax is devoted to cutting the social security tax, keeping the replacement ratio unchanged. It is shown that the reform may improve growth, environmental quality and the nonenvironmental utility of every generation.     

Intergenerational Risk Sharing,Pensions, and Endogenous Labour Supply in General Equilibrium*

We show that a two‐tier pension system, with a pay‐as‐you‐go first tier and a fully funded, defined wage‐indexed second tier, can provide for optimal intergenerational risk‐sharing without distorting the labour supply, thereby achieving the first best. Other arrangements with a fully‐funded second tier fail to achieve the first best.     

Pension,possible phaseout,and endogenous fertility in general equilibrium

The rich literature on Pay-As-You-Go (PAYG)-type pensions provides a notion that when pension return is dominated by the market return, generally it is impossible to phase pension out without hurting any generation. We show that PAYG pensions can indeed be phased out in a much richer framework where fertility is endogenous and general equilibrium effects are present. Interestingly, the factor that helps us to phase the pension out in a Pareto way is hidden in the structure of PAYG pension itself. Individualistic agents fail to recognize the benefits of their fertility decision on these programs and, therefore, end up in an allocation that is strictly dominated by the allocations that internalize this externality. Exploiting this positive externality, competitive economy can improve its allocations and can reach the planner's steady-state in finite time where each generation secures as much utility as in the competitive equilibrium. Clearly, it is possible to transition in a Pareto way to an economy either with no pension or with pensions whose return is not dominated by market return.     

Pension design when fertility fluctuates: The role of education and capital mobility

This study compares alternative designs of an unfunded pension system. Convex combinations between a fixed contribution rate and a fixed benefit rate are considered. The objective is to maximize the expected ex ante welfare under stochastic fertility. The model is a three-period CGE framework where the financing of education and effects on factor prices are accounted for. Factor prices depend on the degree of capital mobility. For low degrees of capital mobility, it is optimal to have a fixed benefit rate in the pension system. But for the small open economy, a fixed contribution rate is optimal if the education system has a fixed benefit rate. In this case individuals in the small open economy are unaffected by fertility fluctuations.     

中国养老保险体系改革的福利经济学分析

本文用一个福利经济学框架推导出在社会福利最大化目标下现收现付制和基金制混合的养老保险体系的最优混合比率 ,模型中考虑了收入分配的因素 ,模型对过往研究中已有的结论进行了扩展 ,显示当一国的工资增长率和人口增长率之和大于投资报酬率 ,或者 ,当收入差距较大时 ,采用现收现付制有益于整个社会福利的改善。用这一框架分析中国的养老保险体系 ,并结合中国养老保险体系改革的特点 ,得出的结论是在当前及今后相当长的时间内 ,以现收现付制为主的体系可以作为中国养老保险体系的选择。文章进一步分析了现收现付制在中国持续运行的空间及其面临的挑战 ,指出这一制度的可持续运行最终取决于劳动生产率和产出的水平及增长     

Public employee pensions and the local labor budget

This paper examines the causes and consequences of public employee pension funding by local governments. The pension funding decision is analyzed within the context of two models: one where current taxpayers stay and pay employees' future retirement benefits and a second model where current taxpayers move and thereby hope to avoid paying future retirement benefits. The empirical results test the alternative models for a sample of 60 large U.S. cities using data for local police and fire services. The effects of underfunding on local wages and employment is then examined and found to be significant. Implications for national pension funding policy are drawn.     

A model of the optimal allocation of government expenditures

Government expenditures can be used for various socioeconomic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay‐as‐you‐go intergenerational contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the steady state.     

Public pensions and growth

This paper investigates the relationship between the size of an unfunded public pension system and economic growth in an overlapping generation economy, in which altruistic parents finance the education of their children and leave bequests. Unlike the existing literature, we model intergenerational altruism by assuming that children's income during adulthood is an argument of parental utility. Unfunded public pensions can promote growth when families face liquidity constraints preventing them from investing optimally in the education of their children. We consider two alternative ways of financing a public pension system, either by levying social contributions in a lump-sum manner or in proportion to labour income. We find that there is no case for unfunded public pensions in economies where bequests are operative. By contrast, there exists a growth-maximising size of the public pension system in economies where bequests are not operative and individuals are sufficiently patient.     

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.