Voting over type and generosity of a pension system when some individuals are myopic

This paper studies the determination through majority voting of a pension scheme when society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but myopics tend to adopt a short-term view (instant gratification) when dealing with retirement saving and labor supply. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. Henceforth, when voting they tend to commit themselves into forced saving. We consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the “Bismarckian factor” that determines its redistributiveness. Individuals vote sequentially. We examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system. Our main result is that a flat pension system is always chosen when all individuals are of one kind (all far-sighted or all myopic), while a less redistributive system may be chosen if society is composed of both myopic and far-sighted agents. Furthermore, while myopic individuals tend to prefer larger payroll taxes than their far-sighted counterparts, the generosity of the system does not always increase with the proportion of myopics.     

Retirement planning in the light of changing demographics

With increasing longevity and decreasing fertility rates, governments and policy makers are increasingly engaged in the question of long term retirement planning. In many cases this has included emphasising the need for individuals to take more responsibility for their own retirement planning through tax incentives, compulsion and changes to the age at which state retirement benefits become available. In the case of Australia, as is considered here, long term retirement planning has been focused around the development of a compulsory defined contribution (DC) superannuation system. Here we investigate the interaction between population ageing and the sustainability of the superannuation system by modelling a general superannuation scheme to compare the adequacy of retirement funds under a number of alternative scenarios. The model incorporates stochastic longevity forecasts and provides insight into the sufficiency of compulsory retirement saving both now and future. We find that the current pension scheme is more robust to longevity improvements for mid-class individuals however significant gaps arise for low-income individuals as longevity improves. Without addressing these issues, government expenditure is expected to increase substantially.     

The Political Power of the Retirees in a Two-Dimensional Voting Model

We show that the retirees are able to obtain favorable pension policies whereas they belong to a minority in the population. The argument relies on the multidimensional nature of the political process. We consider a two‐dimensional collective choice problem. The first of these choices is the level of the contribution rate to the Pay‐As‐You‐Go pension system. The second is a noneconomic decision, unrelated to the pension system. Using a political agency model, we show that, as soon as the retirees are sufficiently numerous, the equilibrium tax rate may be higher than the tax rate preferred by the young, who yet constitute a majority over the pension issue.     

Do tax subsidies for retirement saving affect total private saving? New evidence on middle-income workers*

We exploit exogenous variation from a pension reform in Denmark to estimate the effect of tax subsidies on total private saving. We present new evidence on individuals in the middle of the income distribution and show that a reduction in tax subsidies for retirement saving reduces total private saving. The reform changed the tax incentives for saving in the pension scheme that holds the highest tax advantage for middle-income workers in Denmark. We find that for each unit of reduced saving in this pension scheme, only 64 percent is substituted to other types of saving.     

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.     

Social Security Systems,Human Capital,and Growth in a Small Open Economy

We consider a small open economy in which the level of public education funding is determined by popular vote. We show that growth can be enhanced by the introduction of pay‐as‐you‐go pensions even if the growth rate of aggregate wages falls short of the interest rate. The reason is that the pay‐as‐you‐go (PAYG) system allows future retirees to partially internalize positive externalities of public education due to the positive effect of higher future labor productivity on their pension benefits. The majority support for education funding will be especially strong when the PAYG benefit formula is flat, i.e., progressively redistributive. If a flat benefit PAYG pension system is in place then the economy will achieve the highest growth rate relative to the alternative pension system designs. While such PAYG pension system may be opposed by the majority of working individuals due to inferior returns to their pension contributions relative to a funded scheme, it is likely to be politically sustained by a coalition of older individuals and lower income workers.     

Social Desirability of Earnings Tests

Abstract. In many countries, pension systems involve some form of earnings test; i.e. an individual's benefits are reduced if he has labor income. This paper examines whether or not such earnings tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and in their health status. The working life of an individual has two 'endings': an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labor income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before. We show under which conditions earnings tests emerge both under a linear and under a non-linear tax scheme. In particular, we show that earnings tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.     

Income tax policy and lifetime labor supply

A progressive income tax structure provides incentives for individuals to alter their rate of work and their age of retirement. Compared to a zero tax or proportional tax equilibrium, progressive taxation induces individuals to take less leisure in the form of retirement in exchange for more leisure during the worklife, especially at high wage levels. The imposition of a special pension tax provision on top of a progressive tax structure offsets the distortion on leisure alternatives imposed by progressivity. Indeed, the pension tax deferral provision can neutralize the impact of tax progressivity on the work profile over life. The magnitude of these tax inducements in the U.S. tax structure are non-trivial and therefore are expected to alter labor supply decisions over the lifetime. The model finds empirical support using data from the Social Security Newly Entitled Beneficiaries Survey.     

Marginal Tax Rates and Tax‐Favoured Pension Savings of the Self‐Employed: Evidence from Sweden*

In recent years, the study of how individuals respond to policies that aim at promoting pension savings has emerged as a vital area of economic research. This paper adds to this body of literature by estimating the tax price elasticity of contributions to tax‐favoured pension‐savings accounts on a population of self‐employed individuals. I exploit a unique total database over the Swedish population that covers the years 1999–2005. Using instrumental variables, I obtain a tax price elasticity estimate of ?0.51 and an income elasticity estimate of 0.13, whereas ordinary least‐squares (OLS) produces estimates that conflict with consumer theory.     

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.     

Inter‐Jurisdictional Competition for Firms*

Regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs. The redistributive goal of regional governments is to support the disabled, who cannot work. Able individuals may work, be involuntary unemployed because of frictions in the labor market, or choose to be voluntary unemployed. Labor force participation decisions depend on regional redistributive policies. Both the size of workforce and tax on firms affect profits and therefore, firms’ location decisions. Allowing regions to engage in tax competition may be efficient. If regions cannot tax firms, they compete by implementing inefficient redistributive policies.     

Life Expectancy and Claiming Behavior in a Flexible Pension System

We study the relationship between early claiming of pensions and incentives in the highly flexible Norwegian public pension system, measuring incentives to claim based on an estimated model for expected longevity. Despite a strong correlation between incentives and claiming decisions, the additional costs to public budgets arising from this selection turn out to be modest. Based on analyses exploiting only variation in expected pensions generated by variation in parental longevities and only claiming of pensions not in conjunction with retirement, we conclude that part of the selection is active: some individuals claim pensions early because they gain from doing so.     

Age-Dependent Taxation and the Optimal Retirement Benefit Formula

Abstract. This paper presents a comprehensive view of lifetime taxation including both explicit taxation through the general tax system and implicit taxation via the retirement benefit formula. Differences in productivity between individuals are unobservable, which provides a rationale for the use of distortionary taxes. It is shown that the optimal structure of age-dependent taxation can be characterized by a generalized Ramsey formula. Furthermore, the paper derives the optimal retirement benefit formula in the presence of the general tax system and examines the compatibility with the financial stability of the pension system.     

The extension of social security coverage in developing countries

We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risks. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.     

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)     

A Dynamic Tiebout Theory of Voluntary vs. Involuntary Provision of Public Goods

This paper considers a dynamic model of Tiebout-like migration between communities that utilize distinct allocation procedures for public goods. At issue is whether voluntary or compulsory procedures are more likely to prevail over time. We model infinitely lived individuals who make repeated, sequential location decisions over one of two communities. Each community uses a distinct mechanism for allocating public goods. The first is one in which contributions are given voluntarily by the citizenry of the community. The second is a compulsory scheme by which individuals are taxed proportionately to wealth with the tax determined by a majority vote. Opportunities to accumulate wealth exist via accumulation of public capital.
The Markov Perfect equilibria of the dynamic game are studied. Our main result shows that when accumulated wealth converges to a steady state, individuals' locational choices eventually "select" the involuntary provision mechanism. This holds despite the fact that unanimous location in the voluntary provision community may in many cases remain as a Nash equilibrium of the static game each period. We also describe conditions under which voluntary provision survives. These conditions require that accumulation of capital fails to decrease wealth dispersion over time. The results are shown to be consistent with findings relating inequality to school choice.     

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.     

目标替代率下的企业年金缴费率——基于税收优惠视角分析

企业年金作为我国养老保险体系中的第二支柱,因缺乏税收优惠政策而发展滞后,难以形成对基本养老保险的有力补充。通过将税收优惠政策和企业年金缴费率联系在一起进行考察,建立年金基金平衡模型,计算出为实现企业年金的目标替代率政府应实行多大程度的税收优惠政策。并运用成本——收益理论对这一税收优惠政策进行可行性评价,最终得到企业年金税收优惠政策能够以较小成本换来企业年金较大发展,并能够较大程度地提高整个社会福利水平的结论。     

个税递延型养老保险——基于税收优惠的思考

个税递延型养老保险因其国际实施的普遍性、对个人投保的激励性和对保险企业的盈利刺激性,成为解决我国个人养老问题的当下选择.养老金计划的发展离不开完备有效的监管.政府在出台相关政策法规时,尽量能做到各类政策并驾齐驱,多管齐下.其中,规范和完善资本市场是发展个人养老金计划的重中之重.     

Aging,Myopia, and the Pay‐As‐You‐Go Public Pension Systems of the G7: A Bright Future?

Public pension systems of the G7 countries were established in an era when contributors far outnumbered beneficiaries. Now, for each beneficiary there are fewer contributors, and this trend is projected to accelerate. To evaluate the prospects for these economies we develop an endogenous growth overlapping generations model. We analyze individuals’ behavior when their expectations regarding longevity are rational or myopic, and examine whether policies exist that can offset any adverse effects of aging. We find that while perfectly anticipated aging is welfare improving, myopia worsens welfare, puts pension systems at risk, and cannot be easily remedied by public policy.