Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-14T01:31:22.516Z Has data issue: false hasContentIssue false
  • English
  • Français

ANALYZING THE EFFICIENCY OF PENSION REFORM: THE ROLE OF THE WELFARE EFFECTS OF FISCAL CLOSURES

Published online by Cambridge University Press:  30 May 2016

Krzysztof Makarski ,
Jan Hagemejer  and
Joanna Tyrowicz
Krzysztof Makarski
Affiliation:
National Bank of Poland and Warsaw School of Economics
Jan Hagemejer*
Affiliation:
National Bank of Poland and University of Warsaw
Joanna Tyrowicz
Affiliation:
University of Warsaw and National Bank of Poland
*
Address correspondence to: Jan Hagemejer, National Bank of Poland, ul. Swietokrzyska 11/21, 00-919, Warszawa, Poland; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Replacing the pay-as-you-go defined benefit (PAYG DB) system with an at least partially funded defined contribution (DC) system generates fiscal costs that need financing. The fiscal closures at hand differ by the channel and the extent of distortions. The main contribution of this paper is a thorough comparison of the welfare effects of the various fiscal closures of the pension system reform. In addition, we decompose the welfare effects to the parts attributable to changing the way pensions are financed (PAYG ⇒ prefunding) and to changing the way pensions are computed (DB ⇒ DC). We show that depending on the fiscal closure, the welfare effects differ substantially for the same pension system reform. The financing of the the pension system gap with public debt allows more intergenerational redistribution.

Keywords

Pay as You GoPension System ReformTime InconsistencyWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Special Issue 5: Recent Topics in Computational Macroeconomics , July 2017 , pp. 1205 - 1234
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors would like to thank Marcin Bielecki, Agnieszka Borowska, and Karolina Goraus for wonderful research assistance. The authors are grateful to Hans Fehr, Fabian Kindermann, Lukasz Drozd, Borys Grochulski, Jaromir Nosal, and Jacek Suda, as well as two anonymous referees, for insightful suggestions. The paper benefited greatly from the comments of the participants of the VID Workshop in Vienna (2013), the Netspar Workshop in Amsterdam (2014), SNDE in New York (2014), ISCEF in Paris (2014), and ICMAIF in Rethymnon (2014). The support of the National Center for Science (Grant UMO-2011/01/D/HS4/04039) is gratefully acknowledged. The usual disclaimer applies.

References

REFERENCES

Aglietta, M., Chateau, J., Fayolle, J., Juillard, M., Le Cacheux, J., Le Garrec, G., and Touzé, V. (2007). Economic Modelling 24 (3), 481–505.Google Scholar
Andolfatto, D. and Gervais, M. (2008) Endogenous debt constraints in a life-cycle model with an application to social security. Journal of Economic Dynamics and Control 32 (12), 3745–3759.Google Scholar
Auerbach, A. and Kotlikoff, L. J. (1987) Dynamic Fiscal Policy. Cambridge, UK: Cambridge University Press.Google Scholar
Bassi, M. (2008) An Egg Today and a Chicken Tomorrow: A Model of Social Security with Quasi-hyperbolic Discounting. CSEF working paper 205, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.Google Scholar
Blake, D. (2000) Does it matter what type of pension scheme you have? Economic Journal 110 (461), 46–81.Google Scholar
Boersch-Supan, A.H. and Ludwig, A. (2010) Old Europe Ages: Reforms and Reform Backlashes. NBER working paper 15744, National Bureau of Economic Research.CrossRefGoogle Scholar
Boersch-Supan, A. and Weiss, M. (2011) Productivity and Age: Evidence from Work Teams at the Assembly Line. MEA discussion paper 148-2007, Mannheim Research Institute for the Economics of Aging (MEA).Google Scholar
Bouzahzah, M., De la Croix, D., and Docquier, F. (2002) Policy reforms and growth in computable OLG economies. Journal of Economic Dynamics and Control 26 (12), 2093–2113.CrossRefGoogle Scholar
Breyer, F. (1989) On the intergenerational Pareto efficiency of pay-as-you-go financed pension systems. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft 145 (4), 643–658.Google Scholar
Bucher-Koenen, T. and Lusardi, A. (2011) Financial Literacy and Retirement Planning in Germany. MEA discussion paper 11239, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim.CrossRefGoogle Scholar
Cabo, F. and Garcia-Gonzalez, A. (2014) The endogenous determination of retirement age and social security benefits. Macroeconomic Dynamics 18, 93–113.Google Scholar
Caliendo, F.N. (2011) Time-inconsistent preferences and social security: Revisited in continuous time. Journal of Economic Dynamics and Control 35 (5), 668–675.Google Scholar
Cipriani, G.P. and Makris, M. (2001) An OLG Model of Endogenous Growth and Ageing. Discussion Papers 0102, Department of Economics, Exeter University.Google Scholar
Coppola, M. and Wilke, C.B. (2010) How Sensitive are Subjective Retirement Expectations to Increases in the Statutory Retirement Age? The German Case. MEA discussion paper 10207, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim.Google Scholar
Deaton, A. (1997) The Analysis of Household Surveys: A Microeconometric Approach to Development Policy. Baltimore, MD: Johns Hopkins University Press.CrossRefGoogle Scholar
De la Croix, D., Pierrard, O., and Sneessens, H.R. (2013) Aging and pensions in general equilibrium: Labor market imperfections matter. Journal of Economic Dynamics and Control 37 (1), 104–124.Google Scholar
De Nardi, M., Imrohoroglu, S., and Sargent, T.J. (1999) Projected U.S. demographics and Social Security. Review of Economic Dynamics 2 (3), 575–615.Google Scholar
Diamond, P. (1993) Privatization of Social Security: Lessons from Chile. National Bureau of Economic Research working paper 4510.CrossRefGoogle Scholar
Díaz-Giménez, J. and Díaz-Saavedra, J. (2009) Delaying retirement in Spain. Review of Economic Dynamics 12 (1), 147–167.Google Scholar
EC (2012) The 2012 Ageing Report: Economic and Budgetary Projections for the EU27 Member States (2010–2060). Mimeo, European Comission Directorate-General for Economic and Financial Affairs.Google Scholar
Fehr, H. (2000) Pension reform during the demographic transition. Scandinavian Journal of Economics 102 (3), 419–443.CrossRefGoogle Scholar
Fehr, H. (2009) Computable stochastic equilibrium models and their use in pension and ageing research. Economist 157 (4), 359–416.Google Scholar
Fehr, H., Habermann, C., and Kindermann, F. (2008) Social security with rational and hyperbolic consumers. Review of Economic Dynamics 11 (4), 884–903.Google Scholar
Fehr, H. and Kindermann, F. (2010) Pension funding and individual accounts in economies with life-cyclers and myopes. CESifo Economic Studies 56 (3), 404–443.Google Scholar
Feldstein, M. (1995) Would Privatizing Social Security Raise Economic Welfare? Working paper 5281, National Bureau of Economic Research.Google Scholar
Feldstein, M. and Siebert, H. (2002) Social Security Pension Reform in Europe. Chicago: University of Chicago Press.Google Scholar
Findley, S. and Caliendo, F.N. (2015) Time-inconsistency and retirement choice. Economic Letters 129, 4–8.CrossRefGoogle Scholar
Galasso, V. (1999) The U.S. social security system: What does political sustainability imply? Review of Economic Dynamics 2 (3), 698–730.CrossRefGoogle Scholar
Genakoplos, J., Mitchell, O.S., and Zeldes, S.P. (2000) Would a Privatized Social Security System Really Pay a Higher Rate of Return. Technical report 6713, National Bureau of Economic Research.CrossRefGoogle Scholar
Gul, F. and Pesendorfer, W. (2004) Self-control and the theory of consumption. Econometrica 72 (1), 119–158.Google Scholar
Holzman, R. and Stiglitz, J.E. (2001) New Ideas about Old Age Security. Washington, DC: World Bank.CrossRefGoogle Scholar
Huang, H., Imrohoroglu, S., and Sargent, T. (1997) Two computations to fund social security. Macro-economic Dynamics 1, 7–44.Google Scholar
Huggett, M. and Ventura, G. (1999) On the distributional effects of social security reform. Review of Economic Dynamics 2 (3), 498–531.CrossRefGoogle Scholar
Imrohoroglu, A., Imrohoroglu, S., and Joines, D.H. (2003) Time-inconsistent preferences and social security. Quarterly Journal of Economics 118 (2), 745–784.CrossRefGoogle Scholar
Keuschnigg, C., Davoine, T., and Schuster, P. (2012) Aging and Pension Reform, a General Equilibrium Approach. Background paper for the ECA old-age insurance report–-Final report, European Commission.Google Scholar
Kotlikoff, L.J., Smetters, K., and Walliser, J. (1999) Privatizing social security in the U.S.–-Comparing the options. Review of Economic Dynamics 2 (3), 532–574.CrossRefGoogle Scholar
Kuhle, W. (2010) The Optimum Structure for Government Debt. MEA discussion paper 09194, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim.Google Scholar
Kumru, C.S. and Piggott, J. (2010), Should Public Retirement Pensions Be Means-tested? DEGIT conference paper 049, DEGIT, Dynamics, Economic Growth, and International Trade.Google Scholar
Kumru, C.S. and Thanopoulos, A.C. (2011) Social security reform with self-control preferences. Journal of Public Economics 95 (7–8), 886–899.CrossRefGoogle Scholar
Li, H. and Mérette, M. (2005) Population ageing and pension system reform in China: A computable overlapping-generations general equilibrium model analysis. Journal of Chinese Economic and Business Studies 3 (3), 263–277.CrossRefGoogle Scholar
Lindbeck, A. and Persson, M. (2003) The gains from pension reform. Journal of Economic Literature 41 (1), 74–112.Google Scholar
Ludwig, A. and Vogel, E. (2009) Mortality, Fertility, Education and Capital Accumulation in a Simple OLG Economy. MEA discussion paper 09179, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim.Google Scholar
McGrattan, E.R. and Prescott, E.C. (2013), On Financing Retirement with an Aging Population. NBER working paper 18760, National Bureau of Economic Research.Google Scholar
Nishiyama, S. and Smetters, K. (2007) Does social security privatization produce efficiency gains? Quarterly Journal of Economics 122, 1677–1719.Google Scholar
Okamoto, A. (2005a) Simulating fundamental tax reforms in an aging Japan. Economic Systems Research 17 (2), 163–185.Google Scholar
Okamoto, A. (2005b), Simulating progressive expenditure taxation in an aging Japan. Journal of Policy Modeling 27 (3), 309–325.Google Scholar
Sanchez-Marcos, V. and Sanchez-Martin, A.R. (2006) Can social security be welfare improving when there is demographic uncertainty? Journal of Economic Dynamics and Control 30 (9), 1615–1646.Google Scholar
Skirbekk, V. (2004) Age and individual productivity: A literature survey. In Vienna Yearbook of Population Research, Vol. 2, No. 1, pp. 133–153. Vienna: Vienna Institute of Demography.Google Scholar
van de Ven, J. and Weale, M. (2010) Modelling Myopic Responses to Policy: An Enhancement to the NIBAX Model. DWP working paper 88, Department for Work and Pensions at National Institute of Economic and Social Research.Google Scholar
Verbič, M. (2007) Varying the parameters of the Slovenian pension system: An analysis with an overlapping-generations general equilibrium model. Post-communist Economies 19 (4), 449–470.Google Scholar
Verbič, M., Majcen, B., and Van Nieuwkoop, R. (2006) Sustainability of the Slovenian pension system: An analysis with an overlapping-generations general equilibrium model. Eastern European Economics 44 (4), 60–81.Google Scholar
Vogel, E., Ludwig, A., and Boersch-Supan, A. (2012) Aging and Pension Reform: Extending the Retirement Age and Human Capital Formation. Working paper 1476, European Central Bank.Google Scholar
Wright, R., Mérette, M., and Lisenkova, K. (2012) The Impact of Population Ageing on the Labour Market: Evidence from Overlapping Generations Computable General Equilibrium (OLG-CGE) Model of Scotland. SIRE Discussion Papers no. 90, Scottish Institute for Research in Economics, Edinburgh, United Kingdom.Google Scholar
Zhang, J. and Zhang, J. (2009) Longevity, retirement, and capital accumulation in a recursive model with an application to mandatory retirement. Macroeconomic Dynamics 13, 327–348.Google Scholar