The Swedish Experience with Pension Reform

Sweden is one of few countries in Europe to have introduceda comprehensive pension reform. In 1998, Sweden passed legislationthat transformed its public pension system to a notional defined-contribution(NDC) plan— that is, a defined-contribution plan financedon a pay-as-you-go basis. In addition, a second tier of fundedindividual accounts was introduced. The reform had broad politicalsupport with more than 80 per cent of the votes in parliament.This paper discusses the trends in retirement in Sweden andassesses the experience with pension reform. The objective wasto design a fiscally sustainable system tied to economic growthwith a clear link between contributions and benefits. We discussthe challenges in meeting this goal, the extent to which theSwedish reform has succeeded, and how the system affects beneficiaries.The paper evaluates the experience of the individual fundedaccounts to date and concludes with an outlook for the future. Footnotes ¹ E-mail address: annika.sunden{at}sofi.su.se     

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     

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     

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 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.     

Sons, Daughters, and Parental Behaviour

The prevalence of son preference and its implications for familybehaviour in developing countries have received a great dealof scholarly attention, but child-gender bias is believed tobe empirically unimportant in wealthy, non-traditional societies.Studies by sociologists and psychologists during the past 30years, however, have documented consistent discrepancies betweenthe behaviour of parents of sons and parents of daughters—boystend to increase marital stability and marital satisfactionrelative to girls, and fathers spend more time with, and aremore involved with, sons than daughters. In recent years, economistshave begun to contribute to the child-gender literature, re-examiningthe effects of sons and daughters on family structure and parentalinvolvement with larger samples and greater concern for possiblesources of selection bias. Other economic outcomes, such asmarket work and earnings, have also been studied, and some investigatorshave exploited the randomness of child gender as a source ofexogenous variation in parental behaviour. In general, recentresults suggest that child gender does affect family stabilityand the time allocation of parents, but it is not clear whetherthese responses reflect parental preferences for boys ratherthan girls or differences in the constraints parents face. Footnotes ¹ E-mail address: lundberg{at}u.washington.edu     

Regulatory Policy: OECD Experience and Evidence

In the past 20 years a key topic of public-sector reform inOECD countries has been the emergence of regulatory policy.During this period, the nature of regulation has undergone profoundand rapid change. This paper reviews the development of regulatorypolicy in OECD countries over the last quarter-century. It identifiesa range of tools and institutions that have been used by OECDcountries to develop high-quality regulation. The analysis attemptsto show that while there is considerable commonality on broadobjectives of regulatory policy, considerably diversity remainsin the implementation of regulatory policy across OECD countries. Footnotes ¹ E-mail address: nikolai.malyshev{at}oecd.org     

Welfare States in Hard Times

Welfare states have been subject to a host of conflicting pressuresfrom high unemployment, rising income inequality, populationaging, tax competition, rising budget deficits and debts, slowgrowth, and fears that economic dynamism was being stifled byexcessive taxes and benefit levels. Nevertheless total spendingon welfare has edged up in many countries and cuts in ratesof benefit have generally been fairly modest. The generosityof the welfare state has an enormous influence on poverty andincome inequality and still appears to be popular in most ofEurope. Suggestions that society would benefit from reducedworking time must reckon with the fact that it is paid workwhich generates the tax revenue required to fund welfare spending. Footnotes ¹ E-mail addresses: donatella.gatti{at}cepremap.cnrs.fr; andrew.glyn{at}economics.oxford.ac.uk     

From Skills Revolution to Productivity Miracle--Not as easy as it Sounds?

This article surveys the potential impact of skill on productivity.It opens with a review of the utility of productivity as a measureof systemic economic performance, and then goes on to explorethe oft-assumed close and strong relationship between skillsand productivity. The importance of other factors and typesof investment is stressed. These complementary elements maybe at least as important as skill in boosting performance, andtheir absence may negate the impact of public investment ineducation and training. The ability of economic developmentpolicy, particularly as it relates to the Regional DevelopmentAgencies, to address skills and economic development is assessed,and questions are raised about what type and level of skillmight have the largest impact on economic performance. In conclusion,we discuss the demands that new policy approaches are makingupon the machinery and personnel of government. Footnotes ¹ E-mail addresses: keepej{at}cardiff.ac.uk; ken.mayhew{at}pmb.ox.ac.uk;paynej3{at}cardiff.ac.uk     

Job Protection: The Macho Hypothesis

This paper shows that the stringency of employment protectionin Mediterranean countries can be partly explained by culturalvalues embedded in religion. Both the security provided by thislegislation and its redistributive effects in favour of themale breadwinner insiders fit into the framework of Mediterraneanreligions. First, international individual surveys allow usto document that Catholics and Muslims are more likely to agreewith traditional gender division of work than Protestants andthe non-religious. Second, we develop a political economy modelpredicting that employment protection should be more stringentin countries where there is a larger share of insiders supportiveof traditional family values. We then show that this predictionis supported by empirical evidence on OECD countries over theperiod 1970–99. Footnotes ¹ E-mail addresses: yann.algan{at}ens.fr; cahuc{at}ensae.fr     

The Rationale for Occupational Pensions

Employers and employees have no incentive to include pensionsas part of employment contracts unless the pension completesa missing market, or ameliorates an imperfection in existingcapital or labour markets. We examine the influence on the choiceand design of occupational pensions of capital- and labour-marketimperfections. In capital markets, we focus on basis risks,taxation, employer default risks, transactions costs, portfoliorestrictions, and liquidity constraints. Aspects of labour marketsaffecting occupational pensions may be the presence of firm-specifichuman capital, asymmetric information between firms and potentialhires, the presence of moral hazard, and internal labour marketsin firms which cause employers to attempt to control the retirementbehaviour of workers. The implications of this analysis of occupationalpensions for public policy towards pensions are briefly examined. Footnotes ¹ E-mail address: dg.mccarthy{at}imperial.ac.uk     

Regulatory Reform, Capture, and the Regulatory Burden

This paper provides a critique of broad aggregate proposalsto reduce the regulatory burden. It argues that the public debateabout regulatory reform and red tape is loose and general, withlittle regard for the complex ways in which regulation imposescosts and benefits on the economy. Although there are theoreticalreasons to expect regulation to be in excess supply, there islittle empirical analysis to link aggregate regulation withproductivity and economic growth. Regulation is itself a publicgood, and many aspects of economic efficiency require regulationto address market failures. The main efficiency issues are betteraddressed through a disaggregated approach, focusing on when,where, and how to regulate, rather than on crude aggregate estimatesof the total burden. The design of regulation needs to takeaccount of regulatory capture, and it is argued that market-basedinstruments and independent regulatory bodies tend to reducethe scope for capture. The incentives and employment rules governingregulatory institutions are also discussed. In ignoring thesedisaggregated regulatory design problems, crude aggregate targetsfor the reduction of regulation, and rules such as ‘onein, one out’ may be counter-productive. Footnotes ¹ E-mail address: dieter{at}dhelm.co.uk     

Innovation and Productivity Across Four European Countries

This paper compares the role innovation plays in productivityacross four European countries, France, Germany, Spain, andthe UK, using firm-level data from the internationally harmonizedCommunity Innovation Surveys (CIS3). Despite a considerablenumber of national firm-level studies analysing this relationship,cross-country comparisons using micro data are still rare. Weapply a structural model that describes the link between R&Dexpenditure, innovation output, and productivity (CDM model).Our econometric results suggest that overall the systems drivinginnovation and productivity are remarkably similar across thesefour countries, although we also find interesting differences,particularly in the variation in productivity that is associatedwith more or less innovative activities. Footnotes ¹ E-mail addresses: rgriffith{at}ifs.org.uk; ehuergo{at}ccee.ucm.es;jacques.mairesse{at}ensae.fr; b.peters{at}zew.de     

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     

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     

Will Social Welfare Expenditures Survive Tax Competition?

Increasing economic openness creates demands for social welfareprogrammes designed to cushion the impact of economic changes,but may also encourage governments to reduce tax rates to attractmobile economic resources. Competitive tax reductions couldthen prevent governments from being able to finance significantwelfare spending. Alternatively, economic globalization mightimprove the ability of governments to afford social welfareprogrammes—and several considerations point in this direction.First, taxes on internationally mobile activity represent onlysmall fractions of total revenue collections; personal incometaxes, value-added taxes, and social insurance contributionsfinance most social welfare spending. Second, internationalcompetition need not reduce taxes, and indeed, over the past25 years, corporate tax collections have remained high as fractionsof GDP and total taxes. Third, the vitality of a country's economylargely determines its level of social spending. To the extentthat incomes rise as a result, greater economic openness shouldstrengthen provision of social welfare. Footnotes ¹ E-mail address: jrhines{at}umich.edu     

Prudence or Profligacy: Deficits, Debt, and Fiscal Consolidation

Over the last quarter century, public finances have been underpressure in most OECD countries as deficits and debts rose underthe pressure of relatively slow growth and high interest rates.This, in turn, has affected the welfare state, since effortsat containing deficits have often been concentrated on publicexpenditure. Much of the literature argues that this is desirable,since curbing deficits via tax increases seldom succeeds. Amedium-term survey of OECD country experience suggests a lessclear-cut conclusion. In a number of countries which were ableto curb debt/GDP ratios, the bulk of the adjustment did, indeed,come from spending cuts (but was, also, in some cases helpedby rapid growth and/or currency depreciation). In several, however,tax increases also appear to have succeeded in reducing deficitsand debt. Footnotes ¹ E-mail addresses: andrea.boltho{at}magd.ox.ac.uk; andrew.glyn{at}economics.oxford.ac.uk     

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     

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