Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay‐as‐you‐go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer‐provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy's Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.     

Public and Private Pension Spending: Principles,Practice and the Need for Reform

This paper surveys the issue of public spending on pensions. Drawing on evidence from systems around the world, but particularly in Britain, we outline the arguments for different types of public and private provision of pension income and consider how far they go towards meeting the objectives of pension provision. We discuss past trends in spending and look at future projections.     

The future of social security

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.     

Public help and self help: Towards a dual economic approach in social policy

With the welfare state of many Western societies under increasing economic pressure research into new ways of helping them to adapt to changing socioeconomic environments is emerging. Here the welfare state crisis is seen as three-fold—based on cost, benefit and legitimacy. A dualistic approach to welfare provision, incorporating both state help and individual self help is proposed, using examples in housing and public health.     

Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities

We illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation. We calibrate and solve a model of the United Kingdom's compulsory annuity market and examine the impact of gender-based pricing restrictions. We find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the redistribution from men to women that would occur with exogenous Social Security-like annuity contracts. Our findings indicate the importance of endogenous contract responses and illustrate the feasibility of employing theoretical insurance market equilibrium models for quantitative policy analysis.     

Intergenerational risksharing and equilibrium asset prices

In the presence of overlapping generations, a social security system, with contingent taxes and benefits, can affect both asset prices and intergenerational risksharing. In a simple model with two risky factors of production—human capital, owned by the young, and physical capital, owned by all older generations—a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital. Such a system reduces precautionary saving and increases the riskbearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, and lowers the price and risk premium of physical capital.     

Mitigating America's demographic dilemma by pre-funding social security

Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes, which crowd out savings and slow real wage growth below the rate of technological progress. A faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them. Addressing the financing problem by reducing Social Security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees. By contrast, a pre-funding of Social Security financed with consumption taxes more evenly spreads the welfare losses across generations, and it helps future generations, especially the poor, by stimulating capital formation.     

Political-economy of pension plans: Impact of institutions,gender, and culture

National pension systems are an important part of financial intermediation and worker welfare in most countries, but how and why do they differ internationally? Controlling for important political, economic and social institutions, we document that international differences in pension progressivity, or how pensions reflect lifetime earnings, are negatively related to masculinity, uncertainty avoidance, individualism, long-term orientation, employment rights, average pension levels, social trust and economic inequality. We also find that pension progressivity is positively related to the economic and societal role of women, the extent of Catholicism; as well as political voice and accountability. These results provide important insights for both public policy and MNC managers.     

Who Will Pay for Long‐Term Care in the UK? Projections Linking Macro‐ and Micro‐Simulation Models

The long‐term care funding system continues to attract much debate in the UK. We produce projections of state and private long‐term care expenditure and analyse the distributional impact of state‐financed care, through innovative linking of macro‐ and micro‐simulation models. Variant assumptions about life expectancy, dependency and care costs are examined and the impact of universal state‐financed (‘free’) personal care, based on need but not ability to pay, is investigated. We find that future long‐term care expenditure is subject to considerable uncertainty and is particularly sensitive to assumed future trends in real input costs. On a central set of assumptions, free personal care would, by 2051, increase public spending on long‐term care from 1.1 per cent of GDP to 1.3 per cent, or more if it generated an increase in demand. Among the care‐home population aged 85 or over, the immediate beneficiaries of free personal care would be those with relatively high incomes.     

后股改时代划拨国有股充实养老保险基金探讨

2006年是中国证券市场制度变革年,伴随股权分置问题的解决,证券市场进入了后股改时代。在“人口老龄化”趋势下,作为基本养老保险制度之本的养老保险基金正面临着严重的财务危机。本文分析了我国基本养老保险基金的收支现状,预测了基金的收支缺口,探讨了划拨国有股充实养老保险基金的必要性、紧迫性及操作设想。     

At What Age Do You Expect to Retire? Retirement Expectations and Increases in the Statutory Retirement Age

We analyse the extent to which an increase in the statutory retirement age affects individuals' retirement expectations. Understanding how individuals adjust their expectations is crucial to the evaluation of this policy, since retirement expectations directly affect other important decisions such as labour supply, engagement in (further) education and, of course, savings and investments. We consider the 2007 German pension reform that legislated an increase in the statutory retirement age from 65 years to 67. Our analysis is based on a longitudinal study that directly asks respondents at what age they expect to retire. Using a difference‐in‐differences approach, we look at the changes in subjective retirement expectations over time and estimate the extent to which they can be attributed to the 2007 reform. We find that the reform shifted the retirement expectations of the younger cohorts, although there is some heterogeneity in the way individuals adjusted. While there are no significant differences between men and women, lower‐educated individuals failed to revise their expectations. As these individuals usually acquire both lower pension claims and lower private savings, the fact that they have been slower in updating their retirement expectations causes concern regarding their income security after retirement.     

The retirement wealth of the baby boom generation

The paper compares the well-being of the baby boom generation (ages 40-55) in 2001 with the same age group in 1983. I find little evidence that their relative position deteriorated over the period. By some indicators, this generation has seen an improvement. In terms of income, the 40-55 age group was at about the same relative position in 2001 as in 1983. In terms of conventional wealth, there was some slippage over the period. In terms of mean augmented wealth (net worth plus pension and Social Security wealth), their relative position improved somewhat but in terms of median augmented wealth there was again some slippage.     

Global demographic trends and social security reform

How sustainable are the current social security systems in the developed economies, given the projected demographic trends? The most recent literature has answered this question through dynamic general-equilibrium models in a closed-economy framework. This paper provides a new quantitative benchmark of analysis for this question represented by a two-region model (South and North) of the world economy where capital flows across regions. The timing and the extent of the demographic transition—and the associated economic forces shaping capital accumulation and equilibrium factor prices—are very different in the two regions. Thus, the projected paths of interest rate and wage rate in the North diverge substantially between closed and open economy. We perform a wide range of policy experiments under both scenarios. Our main conclusion is that if one is interested in quantifying the path of the fiscal variables (e.g., the value of the payroll tax) needed to keep the social security system viable or to finance a transition towards a fully funded system, then these two benchmarks yield similar results. However, if the focus is on quantifying the path of factor prices, aggregate variables and, ultimately, welfare, then the two approaches can diverge significantly.     

Altruism, incomplete markets, and tax reform

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.