Welfare Analysis of Pension Reforms in an Ageing Japan

This paper uses a computable general equilibrium model with overlapping generations to explore the effects of different public pension schemes on economic welfare, and intergenerational and intragenerational equity. Besides the benchmark case based on the 2004 public pension reform, the present paper considers two alternative reforms: financing the basic pension benefit through a consumption tax, and eliminating the earnings‐related pension benefit. The simulation results suggest that even the consumption‐tax financing of only the basic pension, namely, the combination of both reforms, might not improve overall economic welfare, although it increases economic output by inducing capital formation.     

How should a government finance pension benefits?

Based on an earlier report by Ono (2010), this paper presents consideration of a consumption tax and examines how tax reform to maintain the neutrality of pension benefits affects the income growth rate and the employment rate. A decrease in the rate of worker contribution (labour income tax rate) with an increase in a consumption tax raises employment, but the effect on income growth is ambiguous. A decrease in the rate of firm contribution with an increase in the consumption tax decreases employment and facilitates income growth. Therefore, if the unemployment rate must be decreased, then pension reform with a decrease in the rate of worker contribution should be selected. The results derived through the study described in this paper are consistent with the empirical facts. Moreover, for these analyses, we assume the other production function and confirm the robustness of the obtained results.     

ACHIEVING FISCAL BALANCE IN JAPAN*

Japan is aging and has the highest government debt‐to‐output ratio among advanced economies. In this article, we build a micro data‐based, large‐scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules. Using existing pension law, current fiscal policy, and medium variants of demographic projections, we produce future paths for government expenditures and tax revenues, with implications for government debt and the public pension fund. Additional pension reform, a higher consumption tax, and higher female labor force participation help achieve fiscal stability.     

Pension Reform, Capital Markets and the Rate of Return

Abstract. This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre‐funding – for capital markets in Germany. We use a stylized closed‐economy, overlapping‐generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay‐as‐you‐go contribution rate and thus result in a larger funded component of the pension system. We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby‐boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.     

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.     

When do we Start? Pension reform in ageing Japan

Japan is faced with rapid demographic ageing and fiscal challenges. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by 3 years gradually over a 30‐year period. We consider three scenarios with different points in time to initiate reform in 2020, 2030 and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising tax burden by more than 8% of total consumption. Delaying reform implies a transfer of costs of demographic ageing to the young and deteriorates the welfare of future generations by up to 3% in terms of consumption equivalence.     

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.     

Multilateral Reforms of Trade and Environmental Policy

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production‐generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto‐improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare‐improving when compensating lump‐sum transfers are assumed is also welfare‐improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.     

Marital Status and Derived Pension Rights: A Political Economy Model of Public Pensions with Borrowing Constraints

This paper develops an overlapping‐generations models featuring four types of households: single female, single male, one‐breadwinner couple, and two‐breadwinner couple. The paper considers majority voting over public pension in the presence of derived pension rights for one‐breadwinner couples. In an economy with a low intertemporal elasticity of substitution, borrowing‐constrained one‐breadwinner couples may prefer a lower tax rate than do other types of households, although the former attain a higher benefit‐to‐cost ratio of public pension than do others. Changes in the gender wage gap, the level of derived pension rights, and the fraction of two‐breadwinner couples produce an inverse U‐shaped relationship between the relevant variable and the tax rate.     

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.     

Money Illusion and the Double Dividend in the Short Run

Abstract. In their seminal paper, Bovenberg and de Mooij (1994) elucidate why an ecological tax reform will not yield a double dividend, i.e. fails to increase the efficiency of the tax system. The present paper slightly modifies the Bovenberg and de Mooij model by introducing money illusion. With this modification, an environmental tax reform that raises the price level may generate a double dividend, since the additional tax on the dirty good does not reduce labor supply. A prerequisite for the double dividend to occur is a sufficiently small elasticity of substitution between clean and dirty consumption. Moreover, accounting for money illusion always reduces the intertemporal gross cost of the tax reform.     

The taxation of passive foreign investment: lessons from German experience

Abstract The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited.     

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。     

Income Shifting within a Dual Income Tax System: Evidence from the Finnish Tax Reform of 1993*

Dual income tax systems can suffer from income that shifts from progressively taxed labour income to capital income, which is taxed at a lower, flat rate. This paper empirically examines the 1993 Finnish dual income tax reform, which radically reduced the marginal tax rates on capital income for some, but not all, taxpayers. We measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self‐employed.     

Supply-Side Economics of Germany's Year 2000 Tax Reform: A Quantitative Assessment

Abstract. The paper provides an assessment of supply‐side economics following Germany's year 2000 tax reform. Investigated are a corporate tax cut, deteriorating depreciation allowances and imputation rules, and a private income tax cut. For this purpose, a neoclassical growth model is augmented by various fiscal policy parameters and endogenous corporate finance and calibrated with German data. The model is used to evaluate consequences of Germany's tax reform on production, firm finance and leverage, investment, consumption and welfare of a representative household.     

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.     

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.     

ASSESSING THE WELFARE IMPACT OF TAX REFORM: A CASE STUDY OF THE 2001 U.S. TAX CUT

This paper implements a relatively simple methodological approach to estimate the impact on family welfare of a specific tax reform. The measured impact can differ greatly from simple marginal tax rate comparisons, and conclusions about the distribution of the welfare impact can vary depending on the basis of comparison. For example, absolute welfare gains from the 2001 U.S. tax reform were concentrated among the highest and lowest income families, whereas welfare gains measured as a share of pre‐tax income are found to be nearly monotonically declining in income.     

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 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.