CHANGING PENSION POLICY AND THE AGING OF AMERICA

The recently enacted Tax Reform Act of 1986 contains a number of pension policy provisions including faster vesting for private-sector, single-employer pension plans and imposing tax penalties on preretirement pension plan distributions that are not saved until retirement age. Since pensions are a long-term commitment, the impact of pension policy changes may not be fully realized for a number of years. For that reason, the effects of the Tax Reform Act's pension provisions are investigated using both short-run and long-run simulation models. Faster vesting would immediately entitle an additional 1.9 million pension plan participants to pension benefits at retirement. This increase would not, however, be translated directly into significant gains in pension recipiency for workers currently in their 50s. Nevertheless, by the time the baby boom generation retires, faster vesting and lump-sum penalties could provide more retirees with pensions and increase the standard of living of pension recipients.     

The future of public pensions in the OECD

Demographic changes are often presumed to put the future ofpublic pensions in jeopardy. However, public pension financesshould be sensitive to employment, wage and inequality growth.A few macroeconomic simulations show that, given modest assumptionsabout long-term employment and wage growth, the selected OECDcountries could continue to pay for public pensions. In particular,policies that can help to improve employment growth could beuseful everywhere. Obstacles to public pensions are more likelyto arise from political developments than from economic trends.     

The future of pensions in Europe

Unfunded state pension schemes are projected to become financially unsustainable. This is usually attributed to demographic trends. Yet trends in unemployment and in female labour force participation are quantitatively as important. Improvements in either or both might be sufficient to rescue existing state schemes, especially if combined with an end to the practice of allowing, even after retirement, the value of a pension to rise with national earnings rather than prices.
Attempts at piecemeal reform are important because nothing in economic theory suggests a switch to the alternative, fully funded pensions is desirable. Not only would such a transition be costly, and therefore politically difficult; it also neglects the fact that it makes sense to diversify the retirement portfolio, holding claims both on labour productivity and on capital assets. One can even view pensions as part of a more sophisticated system of intergenerational transfers through which workers finance their earlier education and subsequent retirement.     

Uncertain Pension Income and Household Saving

This paper investigates the relationship between household saving and pensions, and estimates both the displacement effect of pensions on private saving and the precautionary saving effect due to uncertainty in pension income. I estimate the savings equation implied by a simple life‐cycle model featuring income uncertainty using survey data for Dutch households, with subjective expectations on pension benefits and uncertainty. Exploiting exogenous variation due to pension fund performance, I find that households save significantly more due to uncertainty in pension income. Not controlling for uncertainty biases the estimated displacement effect of pensions on private savings towards zero.     

The Gender Pension Gap in China

ABSTRACT

China has had a large gender gap in labor force participation, sectors of employment, and earnings. This study shows that disadvantages in the labor market for women are the primary drivers of the gender pension gap. Among people age 60 and older, women receive about half of the amount of men's social pensions. Using the 2013 wave of China Health and Retirement Longitudinal Study (CHARLS) and the CHARLS Life History Survey of 2014, this contribution has three main findings. First, about three-quarters of the deficit in women's pensions is explained by women's lower likelihood of receiving occupational pensions, and one-third is due to smaller benefits when they do receive them. Second, the gender deficit in receiving an occupational pension can be explained by education level and employment sector. Third, among pension recipients, nearly one-third of the gender benefit gap is explained by women's fewer years of employment and lower salaries.     

Effects of future pension benefits on pre-retirement labor supply: Evidence from Chile

In this paper, I estimate the effect of future pension benefits on pre-retirement labor supply for a representative sample of Chilean workers. Using nonlinear patterns in pension benefit formulas and a reform that permanently changed non-contributory pensions, I estimate the effect of pension accrual and expected pension wealth on labor force and contributory-sector participation, labor earnings, and hours worked. I find that the effect is concentrated on the impact of pension accrual on the probability to contribute to the pension system. The effect is heterogeneous and is concentrated among middle-aged workers, low-skilled workers, and workers with higher financial literacy.     

Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

This study investigates how unfunded public pensions financed by value added tax (VAT), as discussed in Japan, affect economic growth and whether payroll tax (PT) or VAT is the more growth‐friendly tax structure for financing public pensions. We examine these issues using overlapping generations models with parental altruism and find that a public pension system financed by VAT may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT are more growth‐friendly than those financed by PT.     

Gender Inequality in the Spanish Public Pension System

This contribution studies revenue sharing in the public pension system in Spain from a gender perspective, revealing that differences are evident in the percentage of men and women entitled to different types of pensions and in the average fiscal amount per pension for men and women. Using 2010 data, the study analyzes how labor market conditions are reflected in pension type and amount for women pensioners, yielding two important conclusions: the income of women pensioners decreases, relative to men, with age; and the degree of inequality of pensions among women is lower than that among men. These gender differences owe to the contributory character of the system, which reproduces the labor market inequalities of both genders – inequalities that ultimately derive from the social division of roles in which women remain responsible for unpaid care work. This conclusion is consistent with similar studies on other European countries and world regions.     

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.     

National culture and the configuration of public pensions

This paper explores the determinants of public pension plan configurations. It is argued that the level of intragenerational redistribution in public pension plans is related to a country's cultural background. The level of intragenerational redistribution is measured by Krieger and Traub's Bismarckian factor. The countries’ cultural background is operationalized using cultural dimensions developed by Hofstede. The empirical results are in line with our hypotheses. Uncertainty avoidance appears to have a significant, positive association with the Bismarckian factor (low intragenerational redistribution in public pensions), whereas the relation with individualism is negative (high intragenerational redistribution). Moreover, a positive association is found between the Bismarckian factor and inflation shocks in the first half of the 20th century. While the sample size is limited, the results are robust to the inclusion of different economic, institutional, and demographic control variables as well as to using alternative model specifications. These findings have important public policy implications. We argue that pension reform proposals suggesting a transformation of public to private pension provision should consider the cultural background of countries.     

Pension Plan Funding,Technology Choice,and the Equity Risk Premium

In this paper, the impact of Lazear contracts with defined‐benefit pensions on aggregate technology composition and the aggregate risk premium is examined. In the presence of capital market constraints affecting workers, defined‐benefit pensions bias the economy towards risk‐free production. Leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium. This effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk. A key prediction is that as Lazear contracts become less common, risky production will increase and the aggregate risk premium will fall.     

The effect on the Italian private pension market of increased uncertainty concerning public pension provision

This paper examines the effect on the demand for private pensions in Italy of the recent strong increase in uncertainty concernin future public pension provision. Theory suggests that such increase uncertainty will increase the demand for all forms of private sector saving, and, in particular, the demand for private pensions — despite the present generosity of the Italian public pension arrangement. This theoretical proposition is confirmed by an empirical test. The implications are important.     

PUBLIC POLICY TOWARDS PRIVATE PENSIONS

This paper reviews and evaluates public policy towards private pensions which has developed in the U.S. over the past 60 years. It is shown that research results reported in the literature are not sufficiently conclusive to permit resolution of all, or even the most important, efficiency questions that surround pension policy. Given available information, a series of policy recommendations are made to either retain or alter current federal policy towards pensions. Unanswered research questions that prevent a more definitive set of conclusions are identified and discussed     

U.S. Pensions in the 2000s: The Lost Decade?

The last three decades saw a sharp decline in traditional defined benefit (DB) pensions and a corresponding rise in defined contribution (DC) plans. Using the Survey of Consumer Finances from 1983 to 2010, I find that after robust gains in the 1980s and 1990s, pension wealth experienced a marked slowdown in growth from 2001 to 2007 and then fell in absolute terms from 2007 to 2010. Median augmented wealth (the sum of net worth, pensions, and Social Security wealth) advanced slower than median net worth from 1983 to 2007 and its inequality rose more, as DB wealth fell off. However, from 2007 to 2010, the opposite occurred. While median wealth plummeted by 41 percent and inequality spiked by 0.032 Gini points, median augmented wealth fell by only 21 percent and its Gini coefficient rose by only 0.009 points. The differences are due to the moderating influence of Social Security wealth.     

When are voluntary pensions indifferent?

The mandatory pension pillar is usually supplemented by a voluntary one. In our simple model, voluntary pensions partly replace mandatory ones without affecting the outcomes: the voluntary pensions are indifferent. This result may serve as benchmark.     

On myopia as rationale for social security

It has been argued that “paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems.” This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go (PAYG) social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for PAYG pensions. Sufficiently strong myopia may justify such pensions only if agents cannot borrow against their future pension, but then they are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.     

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.     

THE PRESIDENT'S COMMISSION ON PENSION POLICY HOUSEHOLD SURVEY 1979: NET WEALTH DISTRIBUTIONS BY TYPE AND AGE FOR THE UNITED STATES

A household survey was done for the U.S. President's Commission on Pension Policy (1979-81). This paper reports on the net wealth of families in the United States for the year 1979, the first wave of the survey. The survey was begun in September 1979 and was a two-wave, nationwide random sample of households in the United States. The survey instrument gathered information on income, wealth, labor supply, participation in pension plans, vesting status, entitlement to various benefits, attitudinal views on retirement, social security wealth, and individual demographic characteristics. Details of the survey methodology are reported. A response rate of sixty-two percent was achieved among the 6,384 dwelling units in the first wave. Imputations are made to calculate the wealth embodied in private and public employee-based pensions. Included in this valuation is an adjustment for expected vesting status in the pension plan. Net wealth is examined by type and age of the head of household. The average net wealth of the family is $53,956, and the average value of retirement wealth is $3,281 which comprises about 5 to 6 percent of net wealth. The striking changes in the portfolio of net wealth are depicted over the cross-section of age cohorts. The oldest age cohort, 65 and over, is found to have for retirement wealth the lowest frequency of ownership, the lowest proportion of their portfolio in this form of wealth, and the second to lowest average value.     

PENSION CONTRIBUTIONS,PENSION AWARENESS,AND CHANGING PERSONAL FINANCES

Workers with 401(k)s and similar defined contribution pensions adjust contributions facing large fluctuations in personal finances. Using administrative tax records linked to the Health and Retirement Study, this paper shows that adjustments differ for contributors who are aware and unaware of their pension coverage. Unaware contributors are more likely to stop contributing facing deteriorating finances, but adjust contributions similarly along the intensive margin. For example, 25% of unaware contributors stop contributing facing earnings declines, but only 15% of aware contributors do so. These findings have implications for policies like automatic enrollment and information campaigns that encourage retirement savings. (JEL D14, J14, J32, D83)     

Quality-adjusted price indexes for portable computers

The aim of this article is to identify the variables affecting the decision to make contributions to personal pension plans and the amount of such contributions. For this purpose, we specify and estimate a Tobit model for a sample based on the 1995 Personal Income Taxpayers Panel prepared by the Institute of Fiscal Studies (Spanish Ministry of Economy and Finance) formed by 3041 taxpayers, of whom 358 made contributions to pension plans. Our results suggest that individuals decide to invest in pension plans on complex grounds combining the wish to benefit from tax savings and to ensure they will receive supplementary income upon retirement.