Consumption smoothing? Livestock,insurance and drought in rural Burkina Faso

This paper explores the extent of consumption smoothing between 1981 and 1985 in rural Burkina Faso. In particular, we examine the extent to which livestock, grain storage and inter-household transfers are used to smooth consumption against income risk. The survey coincided with a period of severe drought, so the results provide direct evidence on the effectiveness of these various insurance mechanisms when they are the most needed. We find evidence of little consumption smoothing. In particular, there is almost no risk sharing, and households rely almost exclusively on self-insurance in the form of adjustments to grain stocks to smooth out consumption. The outcome, however, is far from complete smoothing. Hence the main risk-coping strategies which are hypothesized in the literature (risk sharing and the use of assets as buffer stocks) were not effective during the survey period.     

Fiscal sustainability and demographics – Should we save or work more?

Approaching demographic shifts are raising concerns about fiscal sustainability in most OECD countries. A widespread view based on the tax-smoothing idea is that a prior consolidation of public finances is required to cope with the predicted trend deterioration in the primary budget balance. However, the smoothing argument cannot unconditionally be applied to the demographic problem. It is important to distinguish between increases in the dependency ratio driven by changes in fertility and longevity. For the former the smoothing argument may be appropriate, but not for the latter. In the case of longevity, a trade-off between consolidation and increasing retirement ages becomes relevant, and there are strong arguments why the latter should be pursued by e.g. linking statutory retirement ages to longevity. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed.     

Do retirement planning strategies alter the effect of time preference on retirement wealth?

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.     

东亚消费风险分担的度量及潜在福利分析

文章利用1970-2004年的相关数据,度量了东亚13个经济体的消费风险分担的程度以及东亚地区在实现完全风险分担后带来的潜在福利收益.实证结果表明:东亚区域资本市场在平滑GDP冲击方面的作用非常小,对区域借贷市场虽有一定的作用,但较为有限,这说明东亚的消费风险分担程度还相当低;相比OECD国家和欧盟国家,东亚各经济体风险分担的福利收益是比较高的.     

Note on Longevity and Aggregate Savings

In a recent paper in this journal, Bloom, Canning and Graham (2003) model the effect of changes in longevity on individual savings. They proceed to present empirical findings about the relation between longevity and aggregate savings. There is a missing link between their empirics and theory: the changes in the populations age density distribution due to increased longevity. This note provides such an aggregation analysis within a simple model with uncertain survival, endogenous life‐cycle consumption and retirement age. It is shown that, with continuous annuitization, an increase in expected longevity raises aggregate steady‐state savings. The magnitude of this effect depends on the economy's age‐specific distribution and on the elasticity of optimum retirement to changes in longevity.     

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

I analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.     

Social Mobility: The Barro–Becker Children Meet the Laitner–Loury Dynasties

I compare the predictions of two types of dynastic models for the persistence of wealth across generations: models that focus on uninsurable risk and intergenerational consumption smoothing but abstract from the fertility decision, such as Loury and Laitner, and models without risk that focus on the fertility decision, such as Becker and Barro. I show that when both uninsurable risk and fertility decisions are present, a striking result obtains: wealthier parents have more children, but the transfer to each child is independent of wealth. Since this result is counterfactual, I also discuss extensions that can resurrect persistence.Journal of Economic LiteratureClassification Numbers: C61, D31, D1, J13     

The effects of longevity and distortions on education and retirement

This article studies the impact of longevity and taxation on life-cycle decisions and long run income. Individuals allocate optimally their total lifetime between education, working and retirement. They also decide at each moment how much to save or consume out of their income, and, after entering the labor market, how to divide their time between labor and leisure. The model incorporates experience–earnings profiles and return to education function that follows evidence from the labor literature. In this setup increases in longevity raises the investment in education—time in school—and retirement. The model is calibrated to the US and is able to reproduce observed schooling trends of the last century. It also reproduces the increase in retirement, as the evidence shows. Simulations show that a country equal to the US but with 20% smaller longevity will be 25% poorer, mostly because of the impact of life expectancy on human capital formation and retirement. In this economy labor taxes have a strong impact on the per capita income, as it decreases labor effort, time at school and retirement age, in addition to the general equilibrium impact over physical capital.     

Investment Decisions,Financial Flows,and Self‐Enforcing Contracts*

This article studies the role of risk sharing in dynamic credit relationships that are secured by physical collateral. It is shown that, when borrowers and lenders cannot commit not to terminate relationships (through default in the first case and liquidation in the second), overinvestment is optimal. Overinvestment facilitates risk sharing in this context: It occurs in expectation of periods in which lenders are unwilling to supply all the funds necessary to achieve complete risk sharing. Typically, overinvestment happens when investment decreases; it slows down the pace at which the capital stock is reduced and therefore results in production smoothing.     

The design of a consumption tax under capital risk

This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.     

Income and consumption smoothing and welfare gains across Pacific Island Countries: The role of remittances and foreign aid

We examine the potential welfare gains and channels of income smoothing for Pacific Island Countries (PICs) and find that, under full risk sharing overall welfare gains across all PICs (particularly, Kiribati, Palau, and Papua New Guinea) are at desirable levels. However, for Australia, the potential welfare gain from risk sharing is almost similar to the gain it obtains if Australia attains full risk sharing with the rest of the OECD countries or with New Zealand alone. We also break down output using the framework of Sørensen and Yosha (1998) to quantify the extent and channels of risk sharing across PICs. For PICs, income-smoothing channels (net factor income and current transfers) play a significant role in buffering the output shock compared to the performance of those channels on smoothing the output shock for OECD countries. Domestic savings also smooth a fair portion of shocks to output, but the extent is much lower compared to that of OECD countries. Further, we analyze the effect of remittances and foreign aid on income smoothing for the PICs excluding Australia and New Zealand. Income smoothing via remittances is highly volatile and significant in recent years, while foreign aid seems to be a stronger and more stable channel for smoothing domestic output shocks for PICs.     

Pension Reforms: An Illustrated Basic Analysis

The paper examines pension reforms under population ageing.The concepts of "implicit pension debt", "implicit tax" and"internal rate of return" are first introduced with the helpof a three-period model. Using stylised facts, ageing is tracedto low fertility and increasing longevity. Formulating a benchmarkfor intergenerational fairness leads to a framework for designingpension reforms such that leaving an unfair burden to futuregenerations is avoided. Secondly, a yearly simulation modelis used to arrive at the following main results for reform blueprints: (1) In a Defined Benefit (DB) system, partial pre-funding isneeded to achieve intergenerational fairness unless benefitsare sufficiently reduced; partial privatisation is an optionfor the management of the accumulating funds. (2) Transition from a DB to a Notional Defined Contribution(NDC) system is another reform option; it reduces the replacementrates to levels which match prescribed contribution rates; anNDC public pillar can be accompanied by a second pillar, managedby the private sector. (3) An effective increase in the retirement age is necessaryto moderate the increase in pension expenditure and to preserveadequate pension levels. (4) Pension reforms have important effects on public financetarget setting. (JEL H1, H5, H6)     

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.     

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.     

多因素影响下的最优年金化时间决策

长寿风险是退休计划中易被低估的风险因素,这类风险因人类寿命的不断延长而快速增大。养老年金具有规避长寿风险和提高消费者效用的双重价值,在养老保障中具有重要的作用。本文系统考虑退休计划中消费者的寿命风险和遗赠需求,讨论年金投资中的最优年金化时间决策,通过构建单周期的最优年金化时间选择模型,分析了消费者在整个退休计划中如何进行年金投资这一多期决策问题。本文最后展示了不同参数设置下的计算结果,以说明消费者的遗赠需求强度与风险厌恶特征、年金管理费率、年金收益与风险水平等因素对最优年金化时间的影响。     

Political intergenerational risk sharing

In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of intergenerational risk sharing chosen by a benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends.     

延迟退休年龄下隔代抚育与劳动参与的抉择*——基于工资收入随机性假定的研究

隔代抚育会对延迟退休年龄政策在促进劳动力供给上产生挤出效应。为了对此进行验证，本文在工资收入随机性的假定及延迟退休5年的情景下，模拟了面临孙辈照护需求的女性临近退休者提前退休所产生的福利变化。进一步，本文采用CHIP和CHARLS的微观调查数据，对不同群组的收入增长率和收入风险进行了估计，继而分析了当面临孙辈照护需求时这些收入特征对退休决策者制度退休和退休后劳动参与抉择产生的影响。总体上，在延迟退休年龄政策下，隔代抚育将对女性劳动力供给产生挤出效应。当面临孙辈照护需求时，女性临近退休者的制度退休抉择主要受自身收入增长率和收入风险的影响，收入增长率越低，或收入风险越高，她们提前退休的意愿就越强烈；制度退休后的劳动参与则更多地受子女收入增长率的影响，子女收入增长率越高，劳动参与的概率越低。     

WOULD AUSTRALIA–NEW ZEALAND BE A VIABLE CURRENCY UNION? EVIDENCE FROM INTERSTATE RISK‐SHARING PERFORMANCES

In this article, we first measure the potential welfare gains from perfect risk sharing among Australian states and New Zealand regions under possible unification. We show that New Zealand regions reap moderate gains from perfect risk sharing when they form a union with Australia, whereas for Australian states, the gains are somewhat similar to what they have attained at the intranational level. Second, we measure the extent of interstate risk sharing and intertemporal smoothing between the two countries. We are able to observe a substantial degree of intertemporal smoothing among Australian states and New Zealand regions, either alone or jointly, thus confirming the permanent income hypothesis. Further, unique to the risk‐sharing literature, we decompose the aggregate (nondiversifiable) output shocks into positive and negative components, in order to assess the strength of risk‐sharing mechanisms across business cycles. The study finds a virtual absence of risk sharing when Australia and New Zealand face negative aggregate fluctuations, raising doubts about the feasibility of the union, particularly during economic downturns. (JEL F41, F36)     

Intergenerational policy and the measurement of tax incidence

We evaluate the ability of generational accounting to assess the potential welfare implications of policy reforms. In an intergenerational context policy reforms usually have redistributive, efficiency, and general equilibrium implications. Our analysis shows that when the policy reform implies changes in economic efficiency, generational accounts can be misleading not only about the magnitude of welfare changes, but also about the identity of who wins and who losses. In contrast, the generational accounts correctly identify welfare changes when the policy reform has only a pure intergenerational redistribution component. We illustrate and quantify this issue in the context of widely considered policy reforms (substitution of consumption for labor taxation, and the increase of retirement age) and in a more general context of optimal policy.     

Increasing life expectancy and optimal retirement in general equilibrium

We analytically assess the effects of changes in longevity on the interest rate, the consumption-savings behavior, and the optimal retirement decision within a dynamic general equilibrium setting. We derive a simple sufficient condition for which the optimal retirement age always increases with life expectancy. Numerical assessment reveals that for realistic parameter values that reflect the situation in industrialized countries, the optimal retirement age indeed increases with life expectancy and the sufficient condition tends to be fulfilled. Together with the fact that the actual retirement age did not increase in industrialized countries over the last decades, while there have been large improvements in longevity, this leads us to conclude that strong monetary and institutional incentives for early retirement exist and these counteract the effects of increasing life expectancy. Our policy conclusion is that the retirement age should be partially linked to life expectancy and that incentives for early retirement should be removed.