To be presented by Oliwia Komada

1. Welfareeectsofscalpolicyinreformingthepensionsystem
Krzysztof Makarski Joanna Tyrowicz Oliwia Komada
FAME | GRAPE, NBP FAME | GRAPE, IZA, IAAEU FAME | GRAPE
Warsaw School of Economics University of Warsaw Warsaw School of Economics
Motivation
Increase in Longevity Fertility drop
→ Financial Preasure
What do we do?
• Challenge the view that in stochastic framework pension system privatization is welfare deterio-
rating
• Provide a systematic overview of the interactions between the pension system reform and scal
closures
• Decompose overall eect of the pension reform into two components: the welfare eect of the
insurance change and eciency change
Result 1: stochastic vs deterministic framework
τk τc
capital tax:
the highest welfare gain
due to eciency
progression:
the smallest welfare loss due
to insurance
Result 2: reform welfare improving politically favored
Fiscal closure Baseline
τk dτk prog. τ τb τc dτc τl dτl
Reform
τk 0.57 0.56 1.01 0.59 0.50 0.65 0.65 0.65 0.66
dτk 0.54 0.54 0.99 0.56 0.47 0.63 0.63 0.63 0.64
prog. -0.45 -0.45 0.02 -0.13 -0.07 -0.35 -0.35 -0.36 -0.34
τ -0.13 -0.12 0.35 0.09 0.14 -0.03 -0.02 -0.03 -0.01
τb -0.15 -0.14 0.33 0.07 0.13 -0.05 -0.04 -0.05 -0.03
τc -0.14 -0.14 0.33 0.11 0.17 -0.04 -0.03 -0.05 -0.03
dτc -0.16 -0.16 0.31 0.09 0.15 -0.07 -0.06 -0.07 -0.05
τl -0.46 -0.46 0.01 -0.11 -0.03 -0.36 -0.35 -0.37 -0.35
dτl -0.45 -0.45 0.01 -0.1 -0.02 -0.36 -0.35 -0.36 -0.35
% of consumption in the reform scenario which you are willing to give up to ensure that the reform take place
• τk is always a good idea (boost eciency)
• eect of debt: small welfare ↓ and huge political support ↑
• progression (almost) always better then τl in the reform (make up for insurance)
Result 3: insurance eciency
τk progression
capital tax:
the highest welfare gain
due to eciency
progression:
the smallest welfare loss due
to insurance
Model
Consumers
• uncertain lifetimes: live for 16 periods,
with stochastic survival thus unintended
bequest
• uninsurable earnings: endogenous labor
with idiosyncratic productivity process
• work till retirement age, later receive pension
• pay Soc Sec contributions, labor, capital,
consumption taxes
Competitive producers
• with standard CD production function
Government
• collects taxes, balances pension system, ser-
vices debt
Pension system
Baseline scenario: PAYG DB
• equal benet for whole cohort (provides in-
surance)
b ¯J,t = ρ · wavg,t
• longevity causes decit (no balancing mech-
anism in the system)
Reform scenario: partially funded DC
• contributions go into PAYG and funded pillar:
τt = τP AY G
t + τF
t
• individual pension accounts (no insurance)
b ¯J,t =
accrued `savings'
life expectancyt
+
accrued savings
life expectancyt
• reform generates a decit in the pension system
⇒ need for scal closure
Closures
• Three new closures : progressive labor tax
capital tax (+ debt)
• Two closures within pension system : con-
tributions pensions
• Four closures outside pension system: con-
sumption tax (+ debt) labor tax (+ debt)
• In total: 9 closures
Conclusions: scal closure DOES metter
• Social security reform requires scal adjustment
• Fiscal closures redistribute and aect eciency. Hence, they matter a lot (unnoticed in earlier
literature)
• Loss of insurance is important but not decisive for evaluation of (partial) privatization
• Preferred policy options
Debt closures: allow to smooth the transition burden on more cohorts
Tax on capital income
Acknowledgements
Authors are grateful to Roel Beetsma, Monika Buetler, Lukasz
Drozd, Borys Grochulski, Hans Fehr, Tim Kehoe, Fabian Kin-
dermann, Finn Kydland, Duke Love, Jaromir Nosal, Franck
Portier, Jose Victor Rios Rull, Ward Romp, Jacek Suda and
Carlos E. Zarazaga for fruitful discussions and useful com-
ments. The support of National Center for Science (grant UMO-
2014/13/B/HS4/03264) is gratefully acknowledged.