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.     

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.     

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.     

The political economy of contributive pensions in developing countries

This paper sheds light on the role of public institutions as a way to reduce tax evasion through a close link between payroll taxation and pension benefits. We use a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation and, where the public system is more efficient in providing annuitized pension benefits than the private sector. We show that in the absence of evasion costs, agents are indifferent to the tax rate level as they can always perfectly adapt compliance so as to face their preferred effective tax rate. There is unanimity in favour of the maximum tax rate and, the public pension system is found to be partially contributive in order to increase tax compliance and thus the resources collected. This, in turn, enables higher redistribution toward the worst-off agents. When evasion costs are introduced, perfect substitutability between compliance and taxation breaks down. At the majority-voting equilibrium, individuals at the bottom of the income distribution who are in favour of more redistribution, and those at the top who want to transfer more resources to the old age, form a coalition against middle-income agents, in favour of high tax rates. In addition to the previous tax base argument, the optimal level of the Bismarkian pillar is now chosen so as to account for political support.     

The German Savings Puzzle

Germany has one of the most generous public pension and health insurance systems of the world, yet private savings are high and remain positive until old age, even for most low income households. How can we explain what we might want to term the “German savings puzzle”? We provide a complicated answer that combines historical facts with capital market imperfections, housing, tax and pension policies. The first part of the paper describes how German households save, based on a synthetic panel of four cross sections of the German Income and Expenditure Survey (“Einkommens- und Verbrauchsstichproben”) collected between 1978 and 1993. The second part links saving behaviour with public policy, notably tax and pension policy.     

Unemployment,wages and pensions

Empirical evidence has shown the existence of a negative relationship between the rates of unemployment and real wages. If pensions are computed according to the wages that workers have contributed, then the unemployment rates during working life may also influence the pensions to which they are entitled. Using data from 2005 to 2012 for the Spanish social security system, we estimate that the unemployment elasticity of real pension is ?0.135. A 1% increase in unemployment rate is associated with a reduction in pension equal to 0.135%. In ‘normal times’, this value could be considered modest, but the Great Recession has increased dramatically the rate of unemployment. In 2012, the rate of unemployment in Spain had increased to 25.7% and in 2015, it had diminished to 20.9%. It is estimated that unemployment rate will not be returned to figures existing before the crisis until middle of the next decade. Moreover, the current reforms in social security systems could interact with the future effects of the current rates of unemployment and cause future pensions to be significantly lower than those estimated by individuals. The economic welfare of the future cohorts of retirees would then be significantly worsened.     

Myopia, redistribution and pensions

This paper reviews a number of recent contributions that study pension design with myopic individuals. Its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations, which is at the heart of most of the results that are presented. The main part of the paper is devoted to the issue of pension design when myopic individual do not save “enough” for their retirement because their “myopic self” (with a high discount rate) emerges when labor supply and savings decisions are made. Some extensions and variations are considered in the second part. In particular we deal with situations where labor disutility or preferences for consumption are subject to “habit formation” and where sin goods have a detrimental effect on second period health. Myopic individuals tend to underestimate the effects of both habit formation and sinful consumption, which complicates public policy.     

Redistributive pensions in the developing world

Redistributive so‐called social pension schemes have seen a remarkable surge in developing countries. These schemes often target the rural elderly and correlate with urbanization rates, urban rural‐wage differentials, and family norms. We use this stylized evidence to motivate a political economy model for a Beveridgean pension system with trade‐offs between four groups: the (poorer) rural old and young, and the (richer) urban old and young. We show under which conditions governments will install a pension system and increase its generosity as the share of the urban population rises, productivity differentials between urban and rural workers widen, or the social norm erodes. Our conclusion is that the role of the rural–urban divide in shaping redistribution merits more scholarly attention, as the gap between cities and the countryside widens in many developing countries.     

Savings and investment in Australia

It has become popular to advocate tax reduction on the basis of promoting savings, investment and ultimately economic growth. The linkage between the variables is argued by various neoclassical growth models and is further suggested by recent studies which highlight the close association between domestic saving and investment rates. The close association may allow for polices which alter domestic saving levels in order to alter domestic investment levels. This interpretation, however, presumes an endogenous investment response. Equally likely, theoretically, is that the close association is maintained by movements in national savings. The present paper explicitly examines the endogeneity of the Australian saving and investment rates. The results highlight the exogeneity of investment. The results further suggest an endogenous response on the part of Australia's saving rate. The results may limit the potential benefits of these tax changes.     

Savings and default

We develop a model in which individuals compete for a fixed pool of prizes by investing effort in a contest. Individuals belong to two separate and identifiable groups. We say that the contest is discriminatory if a lower share of prizes is reserved for one group than for the other. We show that it can be difficult for an observer to detect the presence or absence of discrimination in the contest, as both regimes can be observationally equivalent. In particular, one group’s belief that it is allocated a lower share of prizes than the other group can be consistent with observed data even if no such group quotas actually exist. Conversely, the belief that the contest does not discriminate can be consistent with data when, in fact, discrimination exists. Incorrect beliefs will therefore not be revised, as the contest generates no evidence to the contrary.     

Optimal education and pensions in an endogenous growth model

In OLG economies with life-cycle saving and exogenous growth, competitive equilibria in general fail to achieve optimality because individuals accumulate amounts of physical capital that differ from the one that maximizes welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, related to education decisions. We propose to recover the Golden Rule of physical and also human capital accumulation. We characterize the optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments, and show that it involves education taxes. Also, when the government subsidizes the repayment of education loans, optimal pensions are positive.     

The Savings Ratio and Financial Repression in Trinidad and Tobago *

This paper investigates the hypothesis financial repression in the context of the Determinates of the private savings ratio in Trinidad and Tobago, using the Multivariate, cointegration time-series methodology. Four alternative proxies are Used to represent financial repression, including the real interest rate, the real interest Rate differential between the world and domestic economy and two alternative Measures of exchange rate misalignment, We find that there is strong evidence to Support the hypothesis of financial repression in Trinidad and Tobago over the sample Period and that financial liberalization may significantly enhance the growth of real Per capita income. [E2, F4, O1]     

Age-specific entrepreneurship and PAYG: Public pensions in Germany

We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that replicates the age-earnings profiles of these two household types. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 0.7% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050.     

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.     

Pay-as-you-go public pensions with endogenous fertility

A 1986 "model of public pensions is generalized to allow for endogenous fertility. We show that gifts to the old, which can be viewed as social security contributions, are always positive in the steady state. An optimal stationary allocation is sustainable if savings are zero and fertility is exogenous. However, the optimal allocation is in general not sustainable. In particular, if a government enforces a social security plan setting the pension level at the optimal gifts and individuals optimize under the pension constraint, the resulting sustainable outcome is in general different from either the optimal or Nash outcome." The geographical focus is on developed countries.