Efficiency versus insurance: The role for fiscal policy in social s...

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Eﬃciency versus insurance:
The role for ﬁscal policy in social security privatization
Joanna Tyrowicz (GRAPE, IAAEU, UW an...

Motivation
• Longevity hazards DB viability: deﬁcit ↑ 1.4% of GDP → reforms
Feldstein, BEA, SSA
2 / 39

Motivation
• Longevity hazards DB viability: deﬁcit ↑ 1.4% of GDP → reforms
Feldstein, BEA, SSA
• (Any) Reform of social s...

Motivation
• Longevity hazards DB viability: deﬁcit ↑ 1.4% of GDP → reforms
Feldstein, BEA, SSA
• (Any) Reform of social s...

Motivation
• Longevity hazards DB viability: deﬁcit ↑ 1.4% of GDP → reforms
Feldstein, BEA, SSA
• (Any) Reform of social s...

Motivation
• Longevity hazards DB viability: deﬁcit ↑ 1.4% of GDP → reforms
Feldstein, BEA, SSA
• (Any) Reform of social s...

Motivation → contribution
Fiscal policy around the pension reform matters:
• counteracts / reinforces redistribution
• aﬀe...

Motivation → contribution
Fiscal policy around the pension reform matters:
• counteracts / reinforces redistribution
• aﬀe...

Literature diﬀers in terms of ﬁnancing the reform
4 / 39

Literature diﬀers in terms of ﬁnancing the reform
• Financing within pension system
• contribution rates (20 papers)
Kumru...

Literature diﬀers in terms of ﬁnancing the reform
• Financing within pension system
• contribution rates (20 papers)
Kumru...

Literature diﬀers in terms of ﬁnancing the reform
• Financing within pension system
• contribution rates (20 papers)
Kumru...

What we do: focus on ﬁscal policy for a given reform
• Scrutinize links between ﬁscal policy and pension system reform
• P...

What we do: focus on ﬁscal policy for a given reform
• Scrutinize links between ﬁscal policy and pension system reform
• P...

What we do: focus on ﬁscal policy for a given reform
• Scrutinize links between ﬁscal policy and pension system reform
• P...

OLG model with income shocks, US
Procedure
Baseline: Redistributive PAYG DB
with aging → deﬁcit
7 / 39

OLG model with income shocks, US
Procedure
Baseline: Redistributive PAYG DB
with aging → deﬁcit
Reform: Individual DC, 50%...

OLG model with income shocks, US
Procedure
Baseline: Redistributive PAYG DB
with aging → deﬁcit
Reform: Individual DC, 50%...

OLG model with income shocks, US
Procedure
Baseline: Redistributive PAYG DB
with aging → deﬁcit
Reform: Individual DC, 50%...

OLG model with income shocks, US
Procedure
Baseline: Redistributive PAYG DB
with aging → deﬁcit
Reform: Individual DC, 50%...

Model
Consumers
• uncertain lifetimes: live for 16 periods, with survival rate πj,t < 1
unintended bequest redistributed w...

Model
Consumers
• uncertain lifetimes: live for 16 periods, with survival rate πj,t < 1
unintended bequest redistributed w...

Model
Consumers
• uncertain lifetimes: live for 16 periods, with survival rate πj,t < 1
unintended bequest redistributed w...

Model
Consumers
• uncertain lifetimes: live for 16 periods, with survival rate πj,t < 1
unintended bequest redistributed w...

Model
Consumers
• uncertain lifetimes: live for 16 periods, with survival rate πj,t < 1
unintended bequest redistributed w...

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
9 / 39

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
• index...

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
• index...

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
• index...

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
• index...

Pension system
Baseline scenario: PAYG DB
• equal beneﬁt for whole cohort (provides insurance)
b ¯J,t = ρ · wavg,t
• index...

Government
• Collects taxes
Tt = τl,t(1 − τt)wtLt + τk,trtAt + τc,tCt + Υt
J
j=1
Nj,t
• Finances government spending Gt = ...

Fiscal policy accompanying the reform
• Three new closures details
• progressive labor tax → labor supply
• capital income...

Fiscal policy accompanying the reform
• Three new closures details
• progressive labor tax → labor supply
• capital income...

Fiscal policy accompanying the reform
• Three new closures details
• progressive labor tax → labor supply
• capital income...

Calibration to replicate US economy (2015)
Preferences
• Preference for leisure φ matches average hours 33%
• Discounting ...

Calibration to replicate US economy (2015)
Preferences
• Preference for leisure φ matches average hours 33%
• Discounting ...

Calibration to replicate US economy (2015)
Preferences
• Preference for leisure φ matches average hours 33%
• Discounting ...

Calibration to replicate US economy (2015)
Preferences
• Preference for leisure φ matches average hours 33%
• Discounting ...

Calibration to replicate US economy (2015)
Demography is based on UN projections.
number of 20-year-olds mortality rates
1...

No reform: deﬁcit ↑
Adjustment in pension parameters
contribution rate ↑ from 7.8% to 9%
tax on pensions ↑ from 0.0% to 17...

Funding the reform requires 2% of GDP (temporarily)
capital labor
Pension system deﬁcit temporary ↑ from 0% to 2% of GDP
1...

Major eﬀects of the reforming
Pensions linked to contributions
1. reduced labor supply distortion (eﬃciency ↑)
2. income s...

Major eﬀects of the reforming
Pensions linked to contributions
1. reduced labor supply distortion (eﬃciency ↑)
2. income s...

Result 1: insurance is small & eﬃciency is large
capital tax: the highest welfare gain due
to eﬃciency
progression: the sm...

Result 2: loss of insurance important but not decisive
τk has larger gain than τc → positive overall welfare eﬀect
18 / 39

Result 3: public debt helps gaining political support
Welfare eﬀect – τk
19 / 39

Result 3: public debt helps gaining political support
Welfare eﬀect - τk & debt + τk
20 / 39

Result 3: public debt helps gaining political support
Welfare eﬀect - transition - τk & debt + τk
actual adjustments
21 / ...

Aggregate welfare eﬀects and political support
Fiscal closure Baseline
τk d + τk prog. τ τb τc d + τc τl d + τl
Reform
τk ...

Aggregate welfare eﬀects and political support
Fiscal closure Baseline
τk d + τk prog. τ τb τc d + τc τl d + τl
Reform
τk ...

Aggregate welfare eﬀects and political support
Fiscal closure Baseline
τk d + τk prog. τ τb τc d + τc τl d + τl
Reform
τk ...

Aggregate welfare eﬀects and political support
Fiscal closure Baseline
τk d + τk prog. τ τb τc d + τc τl d + τl
Reform
τk ...

Summary
The same reform produces different effects depending on fiscal policy:
• efficiency effects of fiscal policy can be big
•...

Summary
The same reform produces different effects depending on fiscal policy:
• efficiency effects of fiscal policy can be big
•...

Where we get from here?
Work in progress:
• AIME + OADSI rather than fully redistributive DB
• Continuous income tax progr...

Where we get from here?
Work in progress:
• AIME + OADSI rather than fully redistributive DB
• Continuous income tax progr...

Where we get from here?
Work in progress:
• AIME + OADSI rather than fully redistributive DB
• Continuous income tax progr...

Thank you and
I am happy to take questions!
w: grape.org.pl
t: grape org
f: grape.org
e: j.tyrowicz@grape.org.pl
25 / 39

New ﬁscal closures: capital income gain tax
GO BACK
• capital income gain tax, τk,t
Tt = τl,t(1 − τt)wtLt + τk,trtAt + τc,...

New ﬁscal closures: labor tax progression
GO BACK
• tr1 the lowest income threshold
• trn is the highest income threshold
...

New ﬁscal closures: labor tax progression
GO BACK
• tr1 the lowest income threshold
• trn is the highest income threshold
...

New ﬁscal closures: labor tax progression
Total gross labor income (1 − τt)wtLt is a sum of n + 1 components: earnings tax...

Fiscal closures within pension system, subsidyt = 0
GO BACK
To keep pension system balanced government may adjust:
• contr...

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

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

Proﬁle of average savings for τk closure
other closures GO BACK

Proﬁle of average labor for τk closure
other closures GO BACK

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

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

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

Capital
GO BACK

Model solving
GO BACK
• Gauss-Seidel iterative algorithm
• Guess an initial value for k = K/(zL) and compute prices
• Solv...

Model solving
GO BACK
• Gauss-Seidel iterative algorithm
• Guess an initial value for k = K/(zL) and compute prices
• Solv...

Model solving
GO BACK
• Gauss-Seidel iterative algorithm
• Guess an initial value for k = K/(zL) and compute prices
• Solv...

Model solving
GO BACK
• Gauss-Seidel iterative algorithm
• Guess an initial value for k = K/(zL) and compute prices
• Solv...

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