Makarski AGENTA 2017

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Motivation Model Calibration Results
Welfare eﬀects of ﬁscal policy in reforming the
pension system
Krzysztof Makarski
(wi...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
Longevity ⇑
Pay-As-You-Go Defined Benefits (PAYG DB) ⇒ fiscally unstable
if n...

Motivation Model Calibration Results
Motivation
in deterministic setting horse-race between
eﬃciency
ﬁscal cost for cohort...

Motivation Model Calibration Results
Motivation
in deterministic setting horse-race between
eﬃciency
ﬁscal cost for cohort...

Motivation Model Calibration Results
Motivation
in deterministic setting horse-race between
eﬃciency
ﬁscal cost for cohort...

Motivation Model Calibration Results
Motivation
in deterministic setting horse-race between
eﬃciency
ﬁscal cost for cohort...

Motivation Model Calibration Results
Literature diﬀers in terms of ﬁscal closures
4 / 50

Motivation Model Calibration Results
Literature diﬀers in terms of ﬁscal closures
Pension system parameters
contribution r...

Motivation Model Calibration Results
Literature diﬀers in terms of ﬁscal closures
Pension system parameters
contribution r...

Motivation Model Calibration Results
Literature diﬀers in terms of ﬁscal closures
Pension system parameters
contribution r...

Motivation Model Calibration Results
What we do
Challenge the view that in stochastic framework pension system
privatizati...

Motivation Model Calibration Results
What we do
Challenge the view that in stochastic framework pension system
privatizati...

Motivation Model Calibration Results
What we do
Challenge the view that in stochastic framework pension system
privatizati...

Motivation Model Calibration Results
Preview of the results
Nishiyama & Smetters (2007) result is NOT universal ⇔ ﬁscal
cl...

Motivation Model Calibration Results
Preview of the results
Nishiyama & Smetters (2007) result is NOT universal ⇔ ﬁscal
cl...

Motivation Model Calibration Results
Contents
1 Motivation
2 Model
3 Calibration
4 Results
8 / 50

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
9 / 50

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Consumers
uncertain lifetimes: live for 16 periods, with stochastic survival
unintend...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneﬁt for whole cohort (provides insu...

Motivation Model Calibration Results
Government
Collects taxes
Tt = τl,t(1 − τt)wtLt + τk,trtAt + τc,tCt + Υt
J
j=1
Nj,t
F...

Motivation Model Calibration Results
Fiscal closures
Three new closures details
progressive labor tax ⇒ working cohorts wi...

Motivation Model Calibration Results
Fiscal closures
Three new closures details
progressive labor tax ⇒ working cohorts wi...

Motivation Model Calibration Results
Fiscal closures
Three new closures details
progressive labor tax ⇒ working cohorts wi...

Motivation Model Calibration Results
Model solving
Gauss-Seidel iterative algorithm
Guess an initial value for k = K/(zL) ...

Motivation Model Calibration Results
Model solving
Gauss-Seidel iterative algorithm
Guess an initial value for k = K/(zL) ...

Motivation Model Calibration Results
Model solving
Gauss-Seidel iterative algorithm
Guess an initial value for k = K/(zL) ...

Motivation Model Calibration Results
Model solving
Gauss-Seidel iterative algorithm
Guess an initial value for k = K/(zL) ...

Motivation Model Calibration Results
Contents
1 Motivation
2 Model
3 Calibration
4 Results
14 / 50

Motivation Model Calibration Results
Calibration to replicate 2015 US economy
Preferences
Preference for leisure φ matches...

Motivation Model Calibration Results
Calibration to replicate 2015 US economy
Preferences
Preference for leisure φ matches...

Motivation Model Calibration Results
Calibration to replicate 2015 US economy
Preferences
Preference for leisure φ matches...

Motivation Model Calibration Results
Calibration to replicate 2015 US economy
Preferences
Preference for leisure φ matches...

Motivation Model Calibration Results
Calibration to replicate 2015 US economy
Demography is based on the projection by The...

Motivation Model Calibration Results
Reform: gradually replace PAYG DB ...
... with a partially funded deﬁne contribution ...

Motivation Model Calibration Results
Contents
1 Motivation
2 Model
3 Calibration
4 Results
18 / 50

Motivation Model Calibration Results
Baseline: PAYG DB with aging and thus deﬁcit
Adjustment in pension
parameters
contrib...

Motivation Model Calibration Results
Reform: partially funded DC
capital labor
Pension system deﬁcit temporary ↑ from 0% t...

Motivation Model Calibration Results
Major eﬀects of the reform
Links pensions to contributions
1 Eﬃciency gain
2 Loss of ...

Motivation Model Calibration Results
Welfare analysis - like Nishiyama & Smetters (2007)
What happens within each experime...

Motivation Model Calibration Results
Compare two diﬀerent tax closures, τc and τk
other closure τk has larger gain than τc...

Motivation Model Calibration Results
Welfare eﬀect - transition
Fiscal closure
Baseline
τk dτk prog. τ τb τc τl dτc dτl
Re...

Motivation Model Calibration Results
Welfare eﬀect - transition
Fiscal closure
Baseline
τk dτk prog. τ τb τc τl dτc dτl
Re...

Motivation Model Calibration Results
Welfare eﬀect - ﬁnal steady state
Fiscal closure
Baseline
τk dτk prog. τ τb τc τl dτc...

Motivation Model Calibration Results
Welfare eﬀect - ﬁnal steady state
Fiscal closure
Baseline
τk dτk prog. τ τb τc τl dτc...

Motivation Model Calibration Results
Welfare eﬀects: why public debt can help gaining political
support?
It helps pensione...

Motivation Model Calibration Results
Welfare eﬀect – τk
Why debt can help gain political support
27 / 50

Motivation Model Calibration Results
Welfare eﬀect - transition - τk & debt + τk
Why debt can help gain political support
...

Motivation Model Calibration Results
Welfare eﬀect - transition - τk & debt + τk
Why debt can help gain political support
...

Motivation Model Calibration Results
Political support
green area denotes welfare gain, green font denotes political suppo...

Motivation Model Calibration Results
Nishiyama & Smetters, 2007: stochastic vs deterministic?
Compare the eﬀects of pensio...

Motivation Model Calibration Results
Nishiyama & Smetters, 2007: stochastic vs deterministic?
Compare the eﬀects of pensio...

Motivation Model Calibration Results
Decomposition
τc τc
capital tax: the highest welfare gain due to eﬃciency
progression...

Motivation Model Calibration Results
Decomposition
τk prog
capital tax: the highest welfare gain due to eﬃciency
progressi...

Motivation Model Calibration Results
Nishiyama & Smetters, 2007: stochastic vs deterministic?
τc
34 / 50

Motivation Model Calibration Results
Nishiyama & Smetters, 2007: stochastic vs deterministic?
τc τk
34 / 50

Motivation Model Calibration Results
Conclusions
Social security reform requires ﬁscal adjustment
Fiscal closures redistri...

Motivation Model Calibration Results
Questions or suggestions?
Thank you!
w: grape.org.pl
t: grape org
f: grape.org
e: kma...

New ﬁscal closures
GO BACK
capital tax tax, τk,t
Tt = τl,t(1 − τt)wtLt + τk,trtAt + τc,tCt + Υt
J
j=1
Nj,t
Gt + subsidyt +...

Fiscal new closures
GO BACK
tr1 the lowest income threshold
trn is the highest income threshold
n is the number of income ...

Fiscal new closures
GO BACK
tr1 the lowest income threshold
trn is the highest income threshold
n is the number of income ...

Fiscal closures new in the literature
Total gross labor income (1 − τt)wtLt is a sum of n + 1 components:
earnings taxed b...

Fiscal closures within pension system
GO BACK
To keep pension system balanced government may adjust:
contribution rate τ
b...

Fiscal closures outside pension system, subsidyt = 0
GO BACK
consumption tax, τc,t
labor tax, τl,t
Tt = τl,t(1 − τt)wtLt +...

Proﬁle of average consumption for τk closure
other closures
in line with Gourinchas & Parker (2002, Econometrica) 42 / 50

Proﬁle of average labor for τk closure
other closures
43 / 50

Proﬁle of average savings for τk closure
other closures
44 / 50

GO BACK
τk debt + τk progression
τ τl debt + τl
τb τc debt + τc
45 / 50

GO BACK
τk debt + τk progression
τ τl debt + τl
τb τc debt +τc
46 / 50

GO BACK
τk debt + τk progression
τ τl debt + τl
τb τc debt +τc
47 / 50

Capital
GO BACK
48 / 50

Labor
GO BACK
49 / 50

GO BACK
τk debt + τk progression
τ τl debt + τl
τb τc debt +τc
50 / 50

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