We analyze political stability of social security that involves funding. We employ an overlapping generations model with intra-cohort heterogeneity. In this setup we introduce funding, which is efficient in Kaldor-Hicks sense and has majority political support. Subsequently, agents vote on capturing the accumulated pension assets, and replacing it with a pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, the distribution of benefits across cohorts living at the time of voting always yields sufficient political support for capturing assets i.e. unfunding pensions. We explain the mechanisms which yield this counter-intuitive result.
The document discusses political support for social security systems and reforms from defined benefit (DB) to funded defined contribution (FDC) plans. It reviews literature on three factors influencing political support: 1) existence of intergenerational transfers, 2) size of transfers, and 3) political economy of social contracts. The literature concludes social security becomes politically stable if initially feasible. The document then models a pension reform from DB to a hybrid DB-FDC system in Poland, examining the distribution of costs and gains and whether the FDC pillar becomes politically stable over time through majority voting.
1. The document analyzes the political stability of pension reforms that transition defined benefit systems to partially funded defined contribution systems in Poland.
2. Through an overlapping generations model calibrated to Poland, it finds that abolishing the funded pillar and shifting back to a purely PAYG system would have majority political support at every vote, as voters prefer lower taxes even if it means lower future pension benefits.
3. Contrary to some prior literature, the model does not find a coalition forming between low-productivity workers and retirees to preserve the status quo. Introducing altruism toward future generations increases stability of the reform.
Political (in)stability of pension system reformOliwia Komada
We analyze the political stability of social security reforms that involve a funded pillar (a.k.a.privatizations of social security). We employ an overlapping generations model with intracohort heterogeneity. The (partial) privatization of social security is efficient in Kaldor-Hickssense and has political support. Subsequently, agents vote on abolishing the funded pillar, capturing the accumulated pension assets, and replacing it with the pay-as-you-go scheme,i.e. \unprivatizing" the pension system. We show that even if such reform reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that \unprivatizing" social security is always politically preferred. We conclude that the correct assignment of property rights over retirement assets may be of crucial importance for
determining the stability of pensions systems with a funded pillar.
Stimulating old-age savings under incomplete rationalityGRAPE
1) Government-subsidized voluntary old-age saving schemes reduce poverty and increase welfare compared to raising payroll taxes or reducing pension benefits alone under incomplete rationality.
2) However, the subsidies disproportionately benefit households who need them least.
3) While capital accumulation increases overall, crowd-out of private savings is large, limiting macroeconomic gains.
We analyze the political stability of capital funded social security. In particular, using a stylized theoretical framework we study the mechanisms behind governments capturing pension assets in order to lower current taxes. This is followed by an analysis of the analogous mechanisms in a fully-fledged overlapping generations model with intra-cohort heterogeneity. Funding is efficient in a Kaldor-Hicks sense. Individuals vote on capturing the accumulated pension assets and replacing the funded pension pillar with a pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, it always has sufficient political support from those alive at the moment of the vote.
Fiscal incentives to pension savings -- are they efficient?GRAPE
Financing consumption of the elderly in the face of the projected increase in life expectancy is a key challenge for economic policy. Moreover, standard structural models with fully rational agents suggest that about 50-60 percent of old-age consumption is financed with voluntary savings, even in the presence of a fairly generous public pension system. This is clearly inconsistent with either the data, or the alarming simulations of old-age poverty in the years to come. Old-age saving (OAS) schemes are widely used policy instruments to address this challenge, but structural evaluations of such instruments remain rare. We develop a framework with incompletely rational agents: lacking financial literacy and experiencing commitment difficulties. We study a broad selection of OAS schemes and find that they raise welfare of financially illiterate agents and to a lesser extent improve welfare of agents with a high degree of time inconsistency. They also reduce the incidence of poverty at old age. Unfortunately, these instruments are fiscally costly, induce considerable crowd-out and direct fiscal transfers mostly to those agents, who need it the least.
We analyze political stability of social security that involves funding. We employ an overlapping generations model with intra-cohort heterogeneity. In this setup we introduce funding, which is efficient in Kaldor-Hicks sense and has majority political support. Subsequently, agents vote on capturing the accumulated pension assets, and replacing it with a pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, the distribution of benefits across cohorts living at the time of voting always yields sufficient political support for capturing assets i.e. unfunding pensions. We explain the mechanisms which yield this counter-intuitive result.
The document discusses political support for social security systems and reforms from defined benefit (DB) to funded defined contribution (FDC) plans. It reviews literature on three factors influencing political support: 1) existence of intergenerational transfers, 2) size of transfers, and 3) political economy of social contracts. The literature concludes social security becomes politically stable if initially feasible. The document then models a pension reform from DB to a hybrid DB-FDC system in Poland, examining the distribution of costs and gains and whether the FDC pillar becomes politically stable over time through majority voting.
1. The document analyzes the political stability of pension reforms that transition defined benefit systems to partially funded defined contribution systems in Poland.
2. Through an overlapping generations model calibrated to Poland, it finds that abolishing the funded pillar and shifting back to a purely PAYG system would have majority political support at every vote, as voters prefer lower taxes even if it means lower future pension benefits.
3. Contrary to some prior literature, the model does not find a coalition forming between low-productivity workers and retirees to preserve the status quo. Introducing altruism toward future generations increases stability of the reform.
Political (in)stability of pension system reformOliwia Komada
We analyze the political stability of social security reforms that involve a funded pillar (a.k.a.privatizations of social security). We employ an overlapping generations model with intracohort heterogeneity. The (partial) privatization of social security is efficient in Kaldor-Hickssense and has political support. Subsequently, agents vote on abolishing the funded pillar, capturing the accumulated pension assets, and replacing it with the pay-as-you-go scheme,i.e. \unprivatizing" the pension system. We show that even if such reform reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that \unprivatizing" social security is always politically preferred. We conclude that the correct assignment of property rights over retirement assets may be of crucial importance for
determining the stability of pensions systems with a funded pillar.
Stimulating old-age savings under incomplete rationalityGRAPE
1) Government-subsidized voluntary old-age saving schemes reduce poverty and increase welfare compared to raising payroll taxes or reducing pension benefits alone under incomplete rationality.
2) However, the subsidies disproportionately benefit households who need them least.
3) While capital accumulation increases overall, crowd-out of private savings is large, limiting macroeconomic gains.
We analyze the political stability of capital funded social security. In particular, using a stylized theoretical framework we study the mechanisms behind governments capturing pension assets in order to lower current taxes. This is followed by an analysis of the analogous mechanisms in a fully-fledged overlapping generations model with intra-cohort heterogeneity. Funding is efficient in a Kaldor-Hicks sense. Individuals vote on capturing the accumulated pension assets and replacing the funded pension pillar with a pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, it always has sufficient political support from those alive at the moment of the vote.
Fiscal incentives to pension savings -- are they efficient?GRAPE
Financing consumption of the elderly in the face of the projected increase in life expectancy is a key challenge for economic policy. Moreover, standard structural models with fully rational agents suggest that about 50-60 percent of old-age consumption is financed with voluntary savings, even in the presence of a fairly generous public pension system. This is clearly inconsistent with either the data, or the alarming simulations of old-age poverty in the years to come. Old-age saving (OAS) schemes are widely used policy instruments to address this challenge, but structural evaluations of such instruments remain rare. We develop a framework with incompletely rational agents: lacking financial literacy and experiencing commitment difficulties. We study a broad selection of OAS schemes and find that they raise welfare of financially illiterate agents and to a lesser extent improve welfare of agents with a high degree of time inconsistency. They also reduce the incidence of poverty at old age. Unfortunately, these instruments are fiscally costly, induce considerable crowd-out and direct fiscal transfers mostly to those agents, who need it the least.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Stimulating old-age savings under incomplete rationalityGRAPE
Fully rational agents respond to old-age savings incentives with complete crowing out, hence any effects of such incentives stem from second order general equilibrium adjustments. However, agents facing constraints in obtaining optimal savings profiles experience also first order effects, i.e. substantial changes to the lifetime profiles of assets accumulation. We develop a fully-fledged overlapping generations model with intra-cohort heterogeneity. In addition to fully rational agents, each generation has also agents with other types of preferences. In this economy we introduce a variety of tax incentivized old-age savings schemes with endogenous participation. We analyze macroeconomic and welfare effects of such instruments.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system – DB – and a transition from a DB to a defined contribution system, DC). Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two policy instruments, which
are widely used: a contribution cap and a minimum pension. We show four main results. First, longevity increases aggregate consumption inequalities substantially in both pension systems, whereas the effect of a pension system reform works to reinforce the consumption inequalities and reduce the
wealth inequalities. Second, the contribution cap has negligible effect on inequalities, but the role for minimum pension benefit guarantee is more pronounced. Third, the reduction in inequalities due to minimum pension benefit guarantee is achieved with virtually no effect on capital accumulation. The
fourth result and the main policy implication of our study, is demonstrating that the minimum pension benefit guarantee addresses mostly the inequalities which stem from differentiated endowments and not those that stem from differentiated preferences.
Concrete and Whole-Picture Type Indices to Measure Policy Preference over Inc...Koji Yamamoto
The document describes a survey conducted in Japan that measured preferences for income redistribution policy. The survey presented respondents with a fictional society consisting of three households with different incomes. It asked respondents to indicate how much tax each household should pay and benefits each should receive. It also asked about an unemployment benefit amount and the policy's perceived effect on economic growth. Regression analysis found higher education correlated with preferring more redistribution, while higher household income correlated with preferring less redistribution.
Pension (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
Evaluating welfare and economic effects of raised fertilityGRAPE
In the context of second demographic transition many countries consider pro-natalistic policies as viable solutions to the fiscal pressure stemming from longevity and declining fertility. However, increased number of births implies immediate economic costs and delayed economic gains. Moreover, quantification of these gains remains a challenge. We develop an overlapping generations model with family structure and utilize this model to quantify the effects in the increases in birth rates. We show the overall welfare and macroeconomic effects as well as distribution of these effects across cohorts. We also show how the distribution of children across families affects those estimations for a given birth rate.
This document discusses using an overlapping generations model to analyze the welfare effects of different fiscal closure options for financing the pension reform in Poland in 1999. The reform transitioned the pension system from a defined benefit pay-as-you-go system to a combination of notional defined contribution and funded defined contribution systems. The model will compare the welfare effects across generations and over time for five different fiscal closure options to finance the gap created by contributions staying in the pay-as-you-go system. The analysis will provide insight into which fiscal closure option has the best effects on savings, labor supply, output, and overall welfare.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
1) A pension system reform from defined benefit to defined contribution in Poland would likely increase consumption inequalities but decrease wealth inequalities.
2) The demographic transition alone would increase consumption inequalities more than the pension reform.
3) Minimum pensions could reduce the rise in consumption inequality from the pension reform by around 40% by targeting those with lower incomes, but would slightly increase consumption by reducing savings incentives. The effects of contribution caps would be negligible.
This document summarizes a study that examines the welfare effects of increasing the retirement age under different pension schemes (defined benefit, notional defined contribution, and funded defined contribution) using overlapping generations models. It finds that increasing the retirement age leads to overall welfare gains in all schemes. The mechanisms through which welfare increases differ across schemes, with labor supply, pensions, taxes, and other macroeconomic variables changing to different degrees depending on the pension design. The study aims to better understand how macroeconomic effects and welfare impacts may vary when the retirement age is increased under different existing pension-benefit linkages.
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz
GRAPEjFAME & University of Warsaw & National Bank of Poland
International Workshop Economic Growth, Macroeconomic Dynamics and
Agents’ Heterogeneity, St. Petersburg, 2017
This document summarizes a study on the welfare effects of Poland's 1999 pension reform, which introduced a three-pillar pension system including a notional defined contribution scheme and a fully funded defined contribution scheme. The study uses an overlapping generations model to assess the aggregate efficiency of the reform, the effects across generations, and the importance of different fiscal closure approaches used to finance the transition. The results show that the reform improved welfare and most gains came from reduced pension benefits rather than pre-funding. The choice of fiscal closure, such as using public debt, also significantly impacted welfare and the distribution of costs across generations.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial adjustments in between cohort and within cohort redistribution. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. In an OLG model with uncertainty, we show that fiscal closure is crucial for determining the welfare effects of the pension system reforms as well as political support for introducing it. We analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that in general, fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. We show the role of the insurance motive implicit in some pension systems for determining the welfare effects of the reform and point to fiscal closures which attenuate and reinforce the relevance of this motive for determining the welfare effects.
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
The document analyzes how inequality changes in an overlapping generations economy with heterogeneous cohorts and pension systems. It finds that wealth and consumption inequalities increase due to demographic transitions and a pension reform from defined benefit to defined contribution systems. Minimum pensions can reduce inequality increases from the reform by 40-50% by raising incomes at the bottom, but have little effect on preferences. Contribution caps have a negligible impact on inequality. Overall, demographic changes contribute more to rising inequalities than the pension system reform.
The document discusses a 2009 reform in Poland that gradually increased the retirement age. It presents the following:
1) The reform eliminated early retirement eligibility for most workers born after 1954 (women) and 1949 (men), increasing the retirement age to 55-60 or 55-65 respectively.
2) Using a regression discontinuity design on longitudinal data, it finds a statistically significant but small discontinuity in transitions to early retirement around the cutoff dates.
3) Placebo tests find similar sized discontinuities in other time periods, suggesting the observed effect may not be caused solely by the reform. The reform had a small impact on retirement behavior relative to its scope.
Political (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, which may decide about abolishing the funded system and replacing it with the pay-as- you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Stimulating old-age savings under incomplete rationalityGRAPE
We study macroeconomic and welfare effects of old-age savings incentives (OAS incentives). Fully rational agents respond to OAS incentives with complete crowding out, hence any effects of such incentives stem from second order general equilibrium adjustments. Meanwhile, agents with incomplete rationality face constraints in obtaining optimal savings profiles, and thus experience also first order effects in presence of OAS incentives. We develop an overlapping generations model with intra-cohort behavioral heterogeneity. In addition to fully rational agents, each generation has also agents with variety of incompletely rational preferences. In this economy we introduce tax incentivized old-age savings schemes with endogenous participation.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Stimulating old-age savings under incomplete rationalityGRAPE
Fully rational agents respond to old-age savings incentives with complete crowing out, hence any effects of such incentives stem from second order general equilibrium adjustments. However, agents facing constraints in obtaining optimal savings profiles experience also first order effects, i.e. substantial changes to the lifetime profiles of assets accumulation. We develop a fully-fledged overlapping generations model with intra-cohort heterogeneity. In addition to fully rational agents, each generation has also agents with other types of preferences. In this economy we introduce a variety of tax incentivized old-age savings schemes with endogenous participation. We analyze macroeconomic and welfare effects of such instruments.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system – DB – and a transition from a DB to a defined contribution system, DC). Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two policy instruments, which
are widely used: a contribution cap and a minimum pension. We show four main results. First, longevity increases aggregate consumption inequalities substantially in both pension systems, whereas the effect of a pension system reform works to reinforce the consumption inequalities and reduce the
wealth inequalities. Second, the contribution cap has negligible effect on inequalities, but the role for minimum pension benefit guarantee is more pronounced. Third, the reduction in inequalities due to minimum pension benefit guarantee is achieved with virtually no effect on capital accumulation. The
fourth result and the main policy implication of our study, is demonstrating that the minimum pension benefit guarantee addresses mostly the inequalities which stem from differentiated endowments and not those that stem from differentiated preferences.
Concrete and Whole-Picture Type Indices to Measure Policy Preference over Inc...Koji Yamamoto
The document describes a survey conducted in Japan that measured preferences for income redistribution policy. The survey presented respondents with a fictional society consisting of three households with different incomes. It asked respondents to indicate how much tax each household should pay and benefits each should receive. It also asked about an unemployment benefit amount and the policy's perceived effect on economic growth. Regression analysis found higher education correlated with preferring more redistribution, while higher household income correlated with preferring less redistribution.
Pension (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
Evaluating welfare and economic effects of raised fertilityGRAPE
In the context of second demographic transition many countries consider pro-natalistic policies as viable solutions to the fiscal pressure stemming from longevity and declining fertility. However, increased number of births implies immediate economic costs and delayed economic gains. Moreover, quantification of these gains remains a challenge. We develop an overlapping generations model with family structure and utilize this model to quantify the effects in the increases in birth rates. We show the overall welfare and macroeconomic effects as well as distribution of these effects across cohorts. We also show how the distribution of children across families affects those estimations for a given birth rate.
This document discusses using an overlapping generations model to analyze the welfare effects of different fiscal closure options for financing the pension reform in Poland in 1999. The reform transitioned the pension system from a defined benefit pay-as-you-go system to a combination of notional defined contribution and funded defined contribution systems. The model will compare the welfare effects across generations and over time for five different fiscal closure options to finance the gap created by contributions staying in the pay-as-you-go system. The analysis will provide insight into which fiscal closure option has the best effects on savings, labor supply, output, and overall welfare.
Inequalities in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
1) A pension system reform from defined benefit to defined contribution in Poland would likely increase consumption inequalities but decrease wealth inequalities.
2) The demographic transition alone would increase consumption inequalities more than the pension reform.
3) Minimum pensions could reduce the rise in consumption inequality from the pension reform by around 40% by targeting those with lower incomes, but would slightly increase consumption by reducing savings incentives. The effects of contribution caps would be negligible.
This document summarizes a study that examines the welfare effects of increasing the retirement age under different pension schemes (defined benefit, notional defined contribution, and funded defined contribution) using overlapping generations models. It finds that increasing the retirement age leads to overall welfare gains in all schemes. The mechanisms through which welfare increases differ across schemes, with labor supply, pensions, taxes, and other macroeconomic variables changing to different degrees depending on the pension design. The study aims to better understand how macroeconomic effects and welfare impacts may vary when the retirement age is increased under different existing pension-benefit linkages.
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
Marcin Bielecki, Krzysztof Makarski and Joanna Tyrowicz
GRAPEjFAME & University of Warsaw & National Bank of Poland
International Workshop Economic Growth, Macroeconomic Dynamics and
Agents’ Heterogeneity, St. Petersburg, 2017
This document summarizes a study on the welfare effects of Poland's 1999 pension reform, which introduced a three-pillar pension system including a notional defined contribution scheme and a fully funded defined contribution scheme. The study uses an overlapping generations model to assess the aggregate efficiency of the reform, the effects across generations, and the importance of different fiscal closure approaches used to finance the transition. The results show that the reform improved welfare and most gains came from reduced pension benefits rather than pre-funding. The choice of fiscal closure, such as using public debt, also significantly impacted welfare and the distribution of costs across generations.
Welfare effects of fiscal policy in reforming the pension systemGRAPE
Most reforms of the pension systems imply substantial adjustments in between cohort and within cohort redistribution. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. In an OLG model with uncertainty, we show that fiscal closure is crucial for determining the welfare effects of the pension system reforms as well as political support for introducing it. We analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that in general, fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. We show the role of the insurance motive implicit in some pension systems for determining the welfare effects of the reform and point to fiscal closures which attenuate and reinforce the relevance of this motive for determining the welfare effects.
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
The document analyzes how inequality changes in an overlapping generations economy with heterogeneous cohorts and pension systems. It finds that wealth and consumption inequalities increase due to demographic transitions and a pension reform from defined benefit to defined contribution systems. Minimum pensions can reduce inequality increases from the reform by 40-50% by raising incomes at the bottom, but have little effect on preferences. Contribution caps have a negligible impact on inequality. Overall, demographic changes contribute more to rising inequalities than the pension system reform.
The document discusses a 2009 reform in Poland that gradually increased the retirement age. It presents the following:
1) The reform eliminated early retirement eligibility for most workers born after 1954 (women) and 1949 (men), increasing the retirement age to 55-60 or 55-65 respectively.
2) Using a regression discontinuity design on longitudinal data, it finds a statistically significant but small discontinuity in transitions to early retirement around the cutoff dates.
3) Placebo tests find similar sized discontinuities in other time periods, suggesting the observed effect may not be caused solely by the reform. The reform had a small impact on retirement behavior relative to its scope.
Political (In)Stability of Social Security ReformGRAPE
In this paper we consider an economy populated by overlapping generations, which may decide about abolishing the funded system and replacing it with the pay-as- you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Stimulating old-age savings under incomplete rationalityGRAPE
We study macroeconomic and welfare effects of old-age savings incentives (OAS incentives). Fully rational agents respond to OAS incentives with complete crowding out, hence any effects of such incentives stem from second order general equilibrium adjustments. Meanwhile, agents with incomplete rationality face constraints in obtaining optimal savings profiles, and thus experience also first order effects in presence of OAS incentives. We develop an overlapping generations model with intra-cohort behavioral heterogeneity. In addition to fully rational agents, each generation has also agents with variety of incompletely rational preferences. In this economy we introduce tax incentivized old-age savings schemes with endogenous participation.
Political (In)Stability of Social Security ReformGRAPE
We analyze the political stability social security reforms which introduce a funded pillar (a.k.a. privatizations). We consider an economy populated by overlapping generations, which introduces a funded pillar. This reform is efficient in Kaldor-Hicks sense and has political support. Subsequently, agents vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that “unprivatizing” social security is always politically favored. This suggests that property rights definition over retirement savings may be of crucial importance for determining the stability of retirement systems with a funded pillar.
This document discusses the challenges of population aging and longevity risk. It notes that population aging is occurring due to declining fertility rates and increasing life expectancies. This poses challenges for pension systems by increasing the number of retirees that pensions must support over longer retirements. Assessing longevity risk, or the uncertainty of future increases in life expectancy, is important for pension funds and annuity providers. Governments can help address longevity risk by regulating mortality tables, developing longevity indices, and potentially issuing longevity bonds to improve hedging of this risk.
Efficiency versus insurance: The role for capital income taxation in social s...GRAPE
We study the interactions between capital income tax and social security in the context of longevity. On the one hand, taxing capital income gains reduces capital accumulation and slows down economic progress. On the other hand, increasing life expectancy raises incentives for capital accumulation, which makes capital relatively less responsive to the tax hikes. Under longevity, reforming social security from a defined benefit system to a defined contribution system limits the extent of fiscal imbalance in the long run, thus further raising efficiency.
The existing view in the literature states that the insurance motive dominates the efficiency gains when evaluating the welfare effects of social security reform with stochastic income shocks. We show, under plausible calibration of the US economy, that the efficiency gain resulting from the interaction of social security and capital income taxation in the context of longevity provide welfare gains sufficient to outweigh the loss of insurance. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support for capital income taxation is feasible.
Plenary session 3 3 tim smeeding stik iariwIARIW 2014
The document summarizes two papers presented at a conference on measuring inequality accounting for social transfers in kind. The first paper from Italy develops a new method for valuing national health services and incorporates adjustments for demographics and regional differences. This raises the estimated value of health subsidies for the poor. The second paper applies the US Supplemental Poverty Measure methodology to compare poverty in the US and Australia, finding that medical out-of-pocket expenses significantly impact poverty rates when accounted for as a resource. The paragraph asks whether thresholds used to measure poverty should also account for in-kind benefits included as resources to have a fully consistent measure of resources versus needs.
Does social security reform reduce gains from higher retirement age?GRAPE
Increasing the minimum eligibility retirement age was evaluated under different pension systems: defined benefit (DB), notional defined contribution (NDC), and fully funded defined contribution (FDC). Raising the retirement age was found to increase welfare in all systems. Under DB, leisure decreased and taxes fell. Under NDC and FDC, leisure decreased but pensions increased. Labor supply adjusted downward for individual workers but increased in aggregate due to longer careers. Capital decreased primarily from lower precautionary savings rather than changes in productivity. Overall, retirement age increases were found to have economy-wide benefits regardless of pension system design.
We analyze political stability of social security that involves pre-funding. We employ an overlapping generations model with intra-cohort heterogeneity and introduce partial funding, which is efficient in Kaldor-Hicks sense and has majority political support. Subsequently, agents vote on capturing the accumulated pension assets, and replacing it with the pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, the distribution of benefits across cohorts living at the time of voting yields always sufficient political support. We explain the mechanisms which yield this counter-intuitive result. Preventing the asset capture requires switching off the fiscal channel, i.e. funding becomes politically stable if capturing of the pension assets cannot be used to reduce taxation and/or public debt.
Eficiency versus insurance: The role for fiscal policy in social security pri...GRAPE
Pension system reforms imply substantial redistribution between cohorts and within cohorts. They also implicitly affect the scope of risk sharing in societies. Linking pensions to individual incomes increases efficiency but reduces the insurance motive implicit in Beveridgean systems. The existing view in the literature argues that the insurance motive dominates the efficiency gains when evaluating the welfare effects. We show that this result is not universal: there exist ways to increase efficiency or compensate the loss of insurance, assuring welfare gains from pension system reform even in economies with uninsurable idiosyncratic income shocks. The fiscal closure, which necessarily accompanies the changes in the pension system, may boost efficiency and/or make up for lower insurance in the pension system. Indeed, fiscal closures inherently interact with the effects of pension system reform, counteracting or reinforcing the original effects. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support is feasible depending on the fiscal closure
Inequality in an OLG economy with heterogeneous cohorts and pension systemsGRAPE
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This document summarizes a study that analyzes the macroeconomic and welfare effects of increasing the retirement age under different pension systems (defined benefit, notional defined contribution, and funded defined contribution). It finds that increasing the retirement age is universally welfare improving. Specifically, it leads to a decrease in average labor supply but an increase in aggregate labor supply. Capital and output per capita decrease due to lower savings. The positive welfare effects are enhanced when productivity increases with age.
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1) Increasing the retirement age leads to welfare gains for all cohorts under all pension schemes by increasing aggregate labor supply and lifetime earnings.
2) The sources of gains differ by pension scheme, for example in fully funded schemes it decreases capital per worker and increases interest rates.
3) Raising the retirement age reduces pension deficits, lowers taxes, and boosts pensions and welfare compared to baseline projections.
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Pension system reforms imply substantial redistribution between cohorts and within cohorts. They also implicitly affect the scope of risk sharing in societies. Linking pensions to individual incomes increases efficiency but reduces the insurance motive implicit in Beveridgean systems. The existing view in the literature argues that the insurance motive dominates the efficiency gains when evaluating the welfare effects. We show that this result is not universal: there exist ways to increase efficiency or compensate for the loss of insurance, assuring welfare gains from pension system reform even in economies with uninsurable idiosyncratic income shocks. The fiscal closure, which necessarily accompanies the changes in the pension system, may boost efficiency and/or make up for lower insurance in the pension system. Indeed, fiscal closures inherently interact with the effects of pension system reform, counteracting or reinforcing the original effects. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support is feasible depending on the fiscal closure.
Concrete and Whole-Picture Type Indices to Measure Redistributive Preference:...Koji Yamamoto
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Similar to Political (In)Stability of Social Security (20)
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Revisiting gender board diversity and firm performanceGRAPE
Cel: oszacować wpływ inkluzywności władz spółek na ich wyniki.
Co wiemy?
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• Większość firm nie ma w ogóle kobiet we władzach
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Gender board diversity spillovers and the public eyeGRAPE
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This presentation was uploaded with the author’s consent.
This presentation by Thibault Schrepel, Associate Professor of Law at Vrije Universiteit Amsterdam University, was made during the discussion “Artificial Intelligence, Data and Competition” held at the 143rd meeting of the OECD Competition Committee on 12 June 2024. More papers and presentations on the topic can be found at oe.cd/aicomp.
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This presentation was uploaded with the author’s consent.
Mastering the Concepts Tested in the Databricks Certified Data Engineer Assoc...SkillCertProExams
• For a full set of 760+ questions. Go to
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Why Psychological Safety Matters for Software Teams - ACE 2024 - Ben Linders.pdfBen Linders
Psychological safety in teams is important; team members must feel safe and able to communicate and collaborate effectively to deliver value. It’s also necessary to build long-lasting teams since things will happen and relationships will be strained.
But, how safe is a team? How can we determine if there are any factors that make the team unsafe or have an impact on the team’s culture?
In this mini-workshop, we’ll play games for psychological safety and team culture utilizing a deck of coaching cards, The Psychological Safety Cards. We will learn how to use gamification to gain a better understanding of what’s going on in teams. Individuals share what they have learned from working in teams, what has impacted the team’s safety and culture, and what has led to positive change.
Different game formats will be played in groups in parallel. Examples are an ice-breaker to get people talking about psychological safety, a constellation where people take positions about aspects of psychological safety in their team or organization, and collaborative card games where people work together to create an environment that fosters psychological safety.
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This presentation was uploaded with the author’s consent.
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Please download this presentation to enjoy the hyperlinks!
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This presentation was uploaded with the author’s consent.
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This presentation was uploaded with the author’s consent.
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This presentation was uploaded with the author’s consent.
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Career goals serve as a roadmap for individuals, guiding them toward achieving long-term professional aspirations and personal fulfillment. Establishing clear career goals enables professionals to focus their efforts on developing specific skills, gaining relevant experience, and making strategic decisions that align with their desired career trajectory. By setting both short-term and long-term objectives, individuals can systematically track their progress, make necessary adjustments, and stay motivated. Short-term goals often include acquiring new qualifications, mastering particular competencies, or securing a specific role, while long-term goals might encompass reaching executive positions, becoming industry experts, or launching entrepreneurial ventures.
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This presentation was uploaded with the author’s consent.
Suzanne Lagerweij - Influence Without Power - Why Empathy is Your Best Friend...Suzanne Lagerweij
This is a workshop about communication and collaboration. We will experience how we can analyze the reasons for resistance to change (exercise 1) and practice how to improve our conversation style and be more in control and effective in the way we communicate (exercise 2).
This session will use Dave Gray’s Empathy Mapping, Argyris’ Ladder of Inference and The Four Rs from Agile Conversations (Squirrel and Fredrick).
Abstract:
Let’s talk about powerful conversations! We all know how to lead a constructive conversation, right? Then why is it so difficult to have those conversations with people at work, especially those in powerful positions that show resistance to change?
Learning to control and direct conversations takes understanding and practice.
We can combine our innate empathy with our analytical skills to gain a deeper understanding of complex situations at work. Join this session to learn how to prepare for difficult conversations and how to improve our agile conversations in order to be more influential without power. We will use Dave Gray’s Empathy Mapping, Argyris’ Ladder of Inference and The Four Rs from Agile Conversations (Squirrel and Fredrick).
In the session you will experience how preparing and reflecting on your conversation can help you be more influential at work. You will learn how to communicate more effectively with the people needed to achieve positive change. You will leave with a self-revised version of a difficult conversation and a practical model to use when you get back to work.
Come learn more on how to become a real influencer!
1. Political (In)Stability of Social Security
Oliwia Komada (GRAPE, and WSE)
Krzysztof Makarski (GRAPE, WSE, and NBP)
Joanna Tyrowicz (GRAPE, IAAEU, UW, and IZA)
International Pension Workshop
Paris, 2019
1
2. Literature
Political support for social security:
• existence of inter-generational transfer
e.g. Samuelson 1958, Aaron 1966, Breyer 1989, Boll et al. 1994, Krieger and Ruhose 2013
• size of these transfers
e.g. Browning 1975, Boldrin and Rustichini 2000, Casamatta et al. 2001
• political economy of a social contract
coalition: low productive workers + retirees
Sjoblom 1985, Boadway and Wildasin 1989a,b, Cooley and Soares 1996, 1999a,b, Tabellini 2000, Conde- Ruiz and
Galasso 2005, Kelley 2014, Parlevliet 2017
Conclusion: social security is politically feasible → becomes politically stable.
cohort denies to contribute to PS → no future cohort pays for its pension.
But: true for PAYG scheme,
This paper: political (in)stability of funded pillar
2
4. The rise and fall of the funded pillar
• Many countries introduced at least partial funding.
see Holzman and Stiglitz 2001, Bonoli and Shinkawa 2006, Gruber and Wise 2009
• Reform: DB PAYG → FDC:
• immediate cost and delayed gains,
• welfare improving. eg. Makarski et al. 2017
3
5. Reform DB → FDC: r > g thus funded pillar increase welfare
Welfare gains from introducing FDC in 1999. Consumption equivalent expressed in
% of permanent consumption from the partial funding scenario.
4
6. Literature review - continued
• Despite general welfare gains...
• ... most of these reforms got reversed.
Jarrett (2011); Schwarz et al. (2014)
• (At least) Some of the reversings welfare deteriorating.
Hagemejer et al. (2015)
5
7. Our contribution:
• Understand/explain the reversing of reforms in Central and
Eastern European countries
• Analyzing political economy of funded pillar.
6
8. What we do: consider political stability of the funded pillar
Suppose there already is funded part in pension system:
→ Brings stable gains in the long-run.
→ Receive political support when introduced.
Key question:
Does it eventually become politically stable?
Expectation: With passing of the initial cohorts, welfare gains become dominant.
If not one should rethink original funding.
Tool:
Overlapping generations model with intra-cohort heterogeneity
7
9. Results - preview
1. Distribution of welfare costs and gains →
abolition of funded pillar always has political support.
2. No coalitions
• low productive workers + retirees,
• patient + workers close to retirement .
3. Abolition (almost) does not effect inequalities.
4. If voters are altruistic, abolition is less probable.
8
12. Model: Overlapping Generations
• Households heterogeneous in their preference and productivity.
• Small open economy: premium risk (Schmitt-Grohe and Uribe (2003)) .
• Firms: perfectly competitive with Cobb Douglas production.
• Pension system: DB → FDC.
• Government: uses taxes to finance deficit in the pension system,
public good and services debt.
10
13. Households
• Are “born” at age 21 (j = 1) and live up to 100 years (J = 80)
• Face cohort and time specific survival probability πj,t
• Belong to a type κ:
• time discounting δκ
• relative leisure preference 1 − φκ
• productivity level ωκ
• Choose labor supply l endogenously
• Maximize remaining lifetime utility derived from consumption c
and leisure 1 − l
Vj,κ,t(aj,κ,t) = uκ(cj,κ,t+j−1, lj,κ,t+j−1)+δκπj,t+1Vj+1,κ,t+1(aj+1,κ,t+1),
where uκ(cj,κ,t, lj,κ,t) = ln cj,κ,t + φκ ln(1 − lj,κ,t)
• Pay taxes (labor, consumption, capital gains) & contribute to
pensions
11
14. Pension system
Initial steady state: defined benefit
• Exogenous contribution rate τ and an exogenous replacement rate ρ
bDB
¯J,κ,t = ρw¯J−1,t−1ωκl¯J−1,κ,t−1
indexed by payroll growth rate
Reform: partially funded defined contribution
• Exogenous contribution rate τ = τPAYG
+ τFF
and actuarially fair individual
accounts
bDC
¯J,κ,t =
accumulated sum of contributions¯J,κ,t
expected remaining lifetime¯J,t
• Contributions and pensions are indexed by:
• payroll growth rate in PAYG,
• tax free interest rate in funded part.
12
15. Government
• Collects taxes τc, τl , τk (sum up to T).
• Covers public good spending
• Covers pension system’s deficit
• Budget closed with τc
13
17. Macroeconomic environment: Polish economy in 1998
Financial market and firms
• global interest rate r∗ = 2%
• risk premium ξ = 0.03 → domestic interest rate
• deprecation d → investment rate 21%
• capital share in GDP α = 0.3
• technological progress zt slows down from 3% to 1.5%, data + AWG projection
Taxation
• labor τl → labor income tax revenues to labor revenue
• consumption τl → VAT revenues over GDP
• capital τk de iure rate 19%
• fiscal rule ρ i D → smooth adjustment of debt and τc
• debt do GDP D/Y = 45%
Pension system
• contribution τ → share of benefits in GDP
• replacement rate ρ → SF deficit
14
18. Macroeconomic environment: Polish economy in 1998
Demography
• Eurostat forecast
• longevity ↑
• fertility ↓
Heterogeneity
• productivity ωκ 10 values based on Structure of Earnings Survey Eurostat
• leisure φκ 4 values based on Structure of Earnings Survey Eurostat
• discount factor δκ 3 values to match wealth Gini and interest rate
15
20. Political economy
What happens within each vote?
• Policy 0 - status quo
• Policy 1 - shift of contributions: funded ⇒ PAYG
(Central and Eastern European countries)
• Policy 2 - shift of assets
• Policy 3 - a combination of the two
(ex. Hungary, Poland, Bulgaria, Slovakia)
16
21. Pure Majority voting
• We run these votes in subsequent years independently.
• If welfare gains, subcohort is in favor.
• Non strategic voting: voter vote according to their preferences.
• If a policy gains majority, it is put in place.
• Order of voting irrelevant (we check that).
Policy 1 against status quo, winner against Policy 2, winner against Policy 3.
17
23. Voting results: funding is not stable.
Political support for each policy change against status quo.
18
24. Rational voters always want to withdraw it.
Political support for each policy change against status quo.
19
25. Vote for policy change
Policy 3: both shifts, voting in 2012, consumption equivalent under the veil of ignorance
expressed in % of permanent consumption from the partial funding scenario
20
26. Vote for policy change, because of lower taxation...
Decomposition of consumption equivalent via partial equilibrium.
21
27. ...regardless of lower pension benefits.
Decomposition of consumption equivalent via partial equilibrium.
tax pensions
22
28. No coalition: low productive workers + retirees.
Policy 3: both shifts, voting in 2012, consumption equivalent expressed
in % of permanent consumption from the partial funding scenario
23
29. No coalition: patient + workers close to retirement.
Policy 3: both shifts, voting in 2012, consumption equivalent expressed
in % of permanent consumption from the partial funding scenario
24
30. Abolition (almost) does not effect inequalities
1. Policy change slightly reduce poverty.
Percentage of population with consumption below 60% of median consumption.
2. We are more equal in the poorer world.
3. The effect almost disappears when the base is kept constant.
Percentage of population with consumption below 60% of median consumption from the initial ss.
4. The effect almost disappears in the long run.
5. The short run improvement concerns mainly retires.
poverty
25
31. Funding more stable if voters care about their children
Support for reducing funded pillar as a function of altruism: voting in 2012,
0 → standard voting,
0.5 → parents care about children’s utility half as much as about their own. 26
33. Conclusions
1. Distribution of welfare costs and gains →
abolition of funded pillar always has political support.
2. No coalitions
• low productive workers + retirees,
• patient + workers close to retirement .
3. Abolition (almost) does not effect inequalities.
4. If voters are altruistic, funding is more stable.
5. Correct assignment of property rights crucial for stability.
27
35. Vote for policy change, because of lower taxation...
Differences in consumption tax relative to baseline (DB→NDC)
expressed in percentage points.
29
36. ... due to conversion of explicit into implicit debt...
Differences in debt level relative to baseline (DB→NDC)
expressed in percentage points.
30
37. ...regardless of lower pension benefits...
Differences in pension benefits relative to baseline (DB→NDC)
expressed in percentage points.
31
38. ... which are lower due to slower accumulation in PAYG pillar
32
39. Policy change slightly reduces poverty...
Relative poverty defined as percentage of population with consumption below
60% of median consumption. 33
40. ... the effect (almost) disappears when base is kept constant
Abolute poverty defined as percentage of population with consumption below
60% of median consumption from the initial steady state (stationarized). 34
41. The short-term improvement concerns mainly retirees
Percentage of retirees with consumption below 60% of median from the initial
steady state consumption. 35
44. Heterogeneity - leisure preference φ
SES Eurostat, 1998, Poland
Leisure preference φ
Result: 4 values for φ
38
45. Heterogeneity - discount factors δ
• We calibrate the central value of δ to match the investment rate
• We don’t have the data on stratified mortality rates or wealth
• We split the model population ad hoc into 3 groups
• Their discount factors are (0.98δ, δ, 1.02δ)
• In total we have 120 types within each cohort
• The resulting consumption Gini index in the initial steady state
is 25.5, consistent with Brzezinski (2011)
39
46. Reform DB → FDC, immediate cost and delayed gains
Differences in pension system deficit in % of GDP
between DB and FDC scenario
40
47. Reform DB → FDC, welfare effect and support
The share of population gaining from introducing FDC in 1999.
41
48. Reform DB → FDC, after transition period everybody gains
The share of population gaining from introducing FDC in 1999.
42