The Economics of Pensions

This paper sets out the economic analytics of pensions. Afterintroductory discussion, successive sections consider the effectsof different pension arrangements on labour markets, on nationalsavings and growth, and on the distribution of burdens and benefits.These areas are controversial and politically highly salient.While we are open about expressing our own views, the main purposeof the paper is to set out the analytical process by which wereach them, to enable readers to form their own conclusions. Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; pdiamond{at}mit.edu     

Pension Challenges and Pension Reforms in Oecd Countries

The 30 OECD member countries have very diverse pension systems.Current old-age public pension spending varies between lessthan 1 and more than 10 per cent of gross domestic product (GDP).Public spending on pensions per person aged 65 or over variesfrom less than 15 to more than 40 per cent of economy-wide GDPper head. For workers entering the labour market today, thetarget pension from all mandatory sources for an average earnervaries between 30 and 100 per cent of individual earnings. Recentpension reforms have a number of common themes. First, pensioneligibility conditions have been tightened. Second, the indexationof pensions in payment has become less generous. Third, somepension schemes link benefit levels to changes in life expectancy.Finally, a number of countries have introduced defined-contributionpensions: privately managed schemes where the pension benefitdepends on contributions and investment returns. Footnotes ¹ E-mail addresses: peter.whiteford{at}oecd.org; edward.whitehouse{at}oecd.org     

The Structural Pension Reform in Chile: Effects, Comparisons with Other Latin American Reforms, and Lessons

Chile pioneered a structural reform in Latin America that privatizedits public pension system and influenced similar reforms inanother nine countries. Twenty-five years later, this articleevaluates the macroeconomic, microeconomic, and social effectsof this reform in Chile and the other countries in the region,and extracts lessons from those experiences. Fiscal costs ofthe reform have been high and prolonged, exceeded capital accumulation,and had a negative impact on national savings, but Chile's reformhas contributed to the development of capital markets; employer'scontributions were eliminated or reduced in half of the countriesand the worker's share in the total contribution averages 65per cent; competition is afflicted by a small number of administratorsand a high level of concentration; administrative costs arehigh and stagnant; capital returns are fair but declining; portfoliodiversification has been achieved only in Chile and Peru; labour-forcecoverage has declined in all ten countries, and gender and incomeinequalities have expanded. Footnotes ¹ E-mail addresses: aarenas{at}dipres.gob.cl; cmesa{at}usa.net     

The Generosity of Social Insurance, 1971-2002

International comparisons of national social policy rely overwhelminglyon programme spending ratios. However, there are widespreadproblems with this type of data as an indicator of trends insocieties' commitments to social protection. This paper suggestsan alternative approach to understanding social commitmentsand introduces a new international data set of social insuranceprogrammes that is comprised of important characteristics ofthree types of public insurance: unemployment, sick pay, andpublic pensions. The data are available annually from the 1970sfor 18 OECD countries. Looking more closely at trends in twoprogramme characteristics, income replacement rates and programmecoverage, we develop an indicator of expected benefits. Accordingto this indicator, there is considerably more evidence of welfarestate retrenchment in recent years than most analyses of publicspending have suggested. Footnotes ¹ E-mail address: lyle.scruggs{at}uconn.edu     

Retirement in the UK

In common with other OECD countries, the UK experienced morethan two decades of declining labour-market activity among oldermen from the 1970s to the early 1990s, a trend that has onlyrecently shown signs of being reversed. Retirement decisionsare heavily shaped by institutional context and in the UK thishas led to there being two distinct groups with very different‘retirement’ experiences. At the top of the wealthdistribution, early retirement has typically been influencedby private, occupational pensions; at the bottom of the wealthdistribution individuals are even more likely to be not workingin their 50s, but do not typically define themselves as retired,and draw on income support, or more usually, disability benefits.Policy-makers keen to increase effective retirement ages willneed to consider the very different circumstances of these twogroups. Footnotes ¹ E-mail addresses: j.banks{at}ifs.org.uk; sarah.smith{at}bristol.ac.uk     

Redesigning Regulation of Pensions and Other Financial Products

We observe that financial regulation is ever-growing, with thelatest area to experience increased supervisory attention beingpensions. Yet this has not made the financial world or consumerssafer, and for pensions in particular there are unexpected andundesired consequences. We explore the current policy approachto supervision, which is ‘bottom up’, i.e. assessmentand regulation of individual institutions, with the aim ofmakingthe financial system safe by making each institution safe. Weshow that this is both damaging (because it stifles innovation)and does not work (because risk will always be squeezed fromthe regulated institutions to the less regulated and less seen).Instead, we advocate a ‘top-down’ approach, whichfocuses on making the system safe first. We conclude that onceyou have made systems safe, detailed supervision of individualinstitutions is less necessary, thus reducing the burden ofsupervision. We believe that this approach will lead to a moresuitable and diverse treatment of different risks that willincrease both systemic and consumer safety. ‘If you haveten thousand regulations you destroy all respect for the law’,Winston Churchill (1931). ‘The ultimate result of shieldingmen from the effects of folly is to fill the world with fools’,Herbert Spencer (1891). Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; john_nugee{at}ssga.com     

A New Pension Settlement for the Twenty-First Century? The UK Pensions Commission's Analysis and Proposals

This article summarizes the analysis and recommendations ofthe UK Pensions Commission, which reported in November 2005.The UK faces similar demographic challenges to other nationsfrom increasing longevity and past fertility declines. However,in the face of them, both state and private pension provisionare in decline for younger cohorts. The Commission proposesreforms to the state pension system which would make it moregenerous, less means-tested, and more universal than it wouldotherwise become. This would require both higher public spendingon pensions as a share of GDP than now, and a gradual increasein state pension age after 2020. It also proposes establishmentof a new National Pension Savings Scheme, into which workerswould be automatically enrolled (with the right to opt out)if they were outside good employer provision, together withmeasures to facilitate later and more flexible retirement. Footnotes ¹ E-mail address: j.hills{at}lse.ac.uk     

Risks at Work: The Demand and Supply Sides of Government Redistribution

To comprehend how the welfare state adjusts to economic shocksit is important to get a handle on both the genesis of popularpreferences and the institutional incentives for governmentsto respond to these preferences. This paper attempts to do both,using a general theoretical framework and detailed data at boththe individual and national levels. In a first step, we focuson how risk exposure and income are related to preferences forredistribution. To test our hypotheses, we extract detailedrisk-exposure measures from labour-force surveys and marry themto cross-national opinion survey data. Results from analysisof these data attest to the great importance of risks withinthe labour market in shaping popular preferences for redistributiveefforts by governments. In a second step, we turn our attentionto the supply side of government redistribution. Institutions,we argue, mediate governments' reactions to redistributionaldemands following economic shocks. Using time-series cross-countrydata, we demonstrate how national training systems, and electoralinstitutions, as well as partisanship, shape government responses. Footnotes ¹ E-mail addresses: tom{at}wz-berlin.de; iversen{at}fas.harvard.edu;pr9{at}duke.edu     

Gender, Time Use, and Public Policy over the Life Cycle

In this paper we compare gender differences in the allocationof time to market work, domestic work, child care, and leisureover the life cycle. Time-use profiles for these activity categoriesare constructed on survey data for three countries: Australia,the UK, and Germany. We discuss the extent to which gender differencesand life-cycle variation in time use can be explained by publicpolicy, focusing on the tax treatment of the female partnerand on access to high-quality, affordable child care. Profilesof time use, earnings, and taxes are compared over the lifecycle defined on age as well as on phases that represent thekey transitions in the life cycle of a typical household. Ourcontention is that, given the decision to have children, life-cycletime use and consumption decisions of households are determinedby them and by public policy. Before children arrive, the adultmembers of the household have high labour supplies and plentyof leisure. The presence of pre-school children, in combinationwith the tax treatment of the second earner's income and thecost of bought-in child care, dramatically change the patternof time use, leading to large falls in female labour supply.We also highlight the fact that, in the three countries we study,female labour supply exhibits a very high degree of heterogeneityafter the arrival of children, and we show that this has importantimplications for public policy. Footnotes ¹ E-mail addresses: pfapps{at}law.usyd.edu.au; ray.rees{at}lrz.uni-muenchen.de     

Network Regulation

This paper assesses how price regulation for energy, water,telecommunications, and rail networks has developed in the twodecades since incentive regulation was introduced. Regulationis necessary because Coasean bargaining is unlikely to produceefficient outcomes, and because the consumer and the firm haverelationship-specific capital and are unable to write long-termcontracts. Incentive regulation has been successful at promotingoperating efficiency in the UK and elsewhere. Incentive regulationhas, so far, also been successful at promoting investment, butsome challenges remain for regulators and policy-makers. Therelationship between the required cost of capital and the extentto which prices are allowed to track costs is explored, andthe implications of the recent large increases in debt-to-equityratios for regulation is discussed. Footnotes ¹ E-mail address: simon.cowan{at}economics.oxford.ac.uk     

Regulation and Productivity Performance

The paper reviews theory and evidence on the ways in which regulationaffects productivity outcomes. In a context of endogenous growth,it is argued that traditional measures of compliance costs missthe potentially most important impacts of regulation on productivitywhich occur through changes in incentives to invest and to innovate.Recent attempts to measure cross-country variations in the strengthof product-market and employment regulation are considered andsome weaknesses are highlighted. Nevertheless, consistent withendogenous growth models, there appears to be quite strong evidencethat regulations which inhibit entry into product markets havean adverse effect on TFP growth in OECD countries. Althoughthere are some discrepancies in the evidence, on most measuresthe UK appears lightly regulated relative to France and Germany,and this may have contributed to a reduction in the recent pastin the UK's TFP gap. Footnotes ¹ E-mail address: n.crafts{at}warwick.ac.uk     

Gender Role Attitudes and the Labour-market Outcomes of Women across OECD Countries

This paper uses data from the World Value Surveys (1990, 1995,1999)to investigate the impact of gender role attitudes and workvalues on women's labour-market outcomes across 25 OECD countries.Anti-egalitarian views are found to display the strongest negativeassociation with female employment rates and the gender paygap. These views are, however, softening among recent cohorts.On the other hand, perceptions of women's role as homemakers,which are likely formed in youth and linked to religious ideology,are more persistent over time. They could be implicated in therecent slowdown of the gender convergence in pay. Finally, theunavoidable clash between family values and egalitarian views,that takes the form of an inner conflict for many women—theso-called ‘mother's guilt’—is another obstaclein the path towards greater gender equality in the labour market. Footnotes ¹ E-mail address: nifortin{at}interchange.ubc.ca     

Why is Productivity so Dispersed?

Many papers have documented wide variations in productivityeven in narrowly defined industries. Some have argued that thisprimarily reflects measurement problems due, for example, tocomparing across different products. Others argue that thisreflects persistent differences in performance due, for example,to management. This paper looks at productivity differencesnot within an industry but within a firm. We use data on productivityof different branches within lines of business of a major UK-basedwholesaler. Using these productivity data for comparisons is,we argue, more likely to compare like with like than comparingbetween firms. We document sustained differences in productivityeven between branches within the same line of business. We alsodiscuss the extent to which they are correlated with differencesin management and find that such differences ‘account’for around 40 per cent of the difference in productivity. Footnotes ¹ E-mail addresses: r.griffith{at}ifs.org.uk; j.e.haskel{at}qmul.ac.uk;a.neely{at}cranfield.ac.uk     

How to Share Our Risks Efficiently? Principles for Optimal Social Insurance and Pension Provision

The efficient organisation of social insurance is an important problem for modern societies. The paper discusses evidence that shocks in labour income have largely persistent effects and analyses the implications of this observation for the optimal design of institutions for wage contracting, social security, and pensions. In an optimal contract, wages reflect variations in individual productivity for incentives reasons. However, the optimal contract insures workers against firm specific shocks. These can better be born by shareholders who can diversify risks on capital markets. Progressive income taxation provides further insurance. On top of that there is scope for additional insurance based on ‘verifiable’ information on unemployment and health conditions. As final form of ‘insurance’, the paper analyzes the role of self-insurance. Income shocks can be absorbed partially by precautionary saving. The individual’s saving plans for retirement and for precaution are, therefore, related issues. In an institutional setting with mandatory saving for retirement, an integration of disability and unemployment insurance on the one hand and the pension system on the other hand in a lifetime savings account allows for this interrelation. The paper analyzes how to deal with the uncertainty in the return on savings in the framework of a lifetime saving account.     

The Assessment: Gender and the Life Cycle

This assessment is an introduction to the Oxford Review of EconomicPolicy's issue on gender and the life cycle. It sets the stageby providing background information on various dimensions ofgender differences, pointing out differences across countriesas well as over time, and relates this evidence to the papersthat follow. It further briefly reviews the articles in theissue and puts them into context. Footnotes ¹ E-mail address: c.dustmann{at}ucl.ac.uk     

THE UK ECONOMY: ANALYSIS AND PROSPECTS

In this section of the Review, Oxford Economic Forecasting providesan analysis of the current economic climate in the UK and abroadas well as setting out the main features of its latest forecast.In Section II, the UK forecast up to 1988 is described. In SectionIII, following the theme of this issue, we analyse the roleof public investment in the UK. Footnotes ¹We are grateful to Vanessa Rossi for her helpful comments.     

Regulation by Prices, Quantities, or Both: A Review of Instrument Choice

Choosing appropriate policy instruments is an important partof successful regulation. Once objectives are agreed and suitabletargets adopted, policy-makers can employ command-and-controlregulation and/or economic instruments, and choose between fixinga price or a quantity. This paper examines the relative advantagesof price, quantity, and hybrid instruments according to: theirefficiency under uncertainty; the trade-off between crediblecommitment and flexibility; implementation; international considerations;and political economy. Various illustrations of the theory areprovided, with two detailed applications to climate change andtransport policy, specifically congestion and ‘safetypricing’. Footnotes ¹ E-mail address: cameron.hepburn{at}economics.ox.ac.uk     

The Financing of Research and Development

Evidence on the ‘funding gap’ for R&D is surveyed.The focus is on financial-market reasons for under-investmentin R&D that persist even in the absence of externality inducedunder-investment. The conclusions are that (i) small and newinnovative firms experience high costs of capital that are onlypartly mitigated by the presence of venture capital; (ii) evidencefor high costs of R&D capital for large firms is mixed,although these firms do prefer internal funds for financingthese investments; (iii) there are limits to venture capitalas a solution to the funding gap, especially in countries wherepublic equity markets are not highly developed; and (iv) furtherstudy of governmental seed capital and subsidy programmes usingquasi-experimental methods is warranted.     

Rethinking Fiscal Policy

The use of fiscal policy as a stabilization device has all butvanished, more or less explicitly in Europe and de facto inthe United States. The practical consequences have not beenentirely satisfactory, in either place. So it is important andtimely that the Oxford Review is devoting a special issue tothe macroeconomics of fiscal policy. In this paper I want todiscuss two underlying questions about the eclipse of fiscalpolicy. Why did this happen and was it a good idea? And if itwas not a good idea, then what follows? Footnotes ¹ E-mail address: jamu{at}mit.edu