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Population ageing undermines traditional social security pension systems that combine pay-as-you-go and defined benefits (DB). Indeed, demographic risk, if guaranteed benefits remain unaltered, will be borne entirely by workers through increases in the contribution rate. To avoid a substantial increase of the contributions and in order to maintain simultaneously the financial sustainability and the social adequacy of the public pension system, risk sharing and automatic balancing mechanisms need to be put in place. We present a two-step convex family of risk-sharing mechanisms. The first shares the risk between contributors and retirees through adjustments in the contribution rate, used to calculate the global covered wage bill, and the benefit ratio that represents the relationship between average pensions and wages. The second step studies how the retirees' risk should be shared between the different retirees' generations through adjustments in the replacement rate and a sustainability factor that affects pension indexation during retirement. We perform a detailed study of the effect of social planner's targets and solidarity weight between various generations in a deterministic and stochastic environment. [ABSTRACT FROM AUTHOR]

We study the effect of inconsistent time preferences on actual and planned retirement timing decisions in two independent data sets. Theory predicts that hyperbolic time preferences can lead to dynamically inconsistent retirement timing. In an online experiment with more than 2,000 participants, we find that time-inconsistent participants retire on average 1.75 years earlier than time-consistent participants do. The planned retirement age of nonretired participants decreases with age. This negative age effect is about twice as strong among time-inconsistent participants. The temptation of early retirement seems to rise in the final years of approaching retirement. Consequently, time-inconsistent participants have a higher probability of regretting their retirement decision. We find similar results for a representative household survey (German SAVE panel). Using smoking behavior and overdraft usage as time preference proxies, we confirm that time-inconsistent participants retire earlier and that nonretirees reduce their planned retirement age within the panel. [ABSTRACT FROM AUTHOR]

As the heterogeneity in life expectancy by socioeconomic status increases, many pension systems imply a wealth transfer from short- to long-lived individuals. Various pension reforms aim to reduce inequalities that are caused by ex-ante differences in life expectancy. However, these pension reforms may induce redistribution effects. We introduce a dynamic general equilibrium-overlapping generations model with heterogeneous individuals that differ in their education, labor supply, lifetime income, and life expectancy. Within this framework we study six different pension reforms that foster the sustainability of the pension system and aim to account for heterogeneous life expectancy. Our results highlight that pension reforms have to be evaluated at various dimensions. Reforms that may increase the sustainability of the pension system are not necessarily conducive to reduce the redistributive wealth transfers from short- to long-lived individuals. Our paper emphasizes the need for studying pension reforms in models with behavioral feedback and heterogeneous socioeconomic groups. [ABSTRACT FROM AUTHOR]

We propose a general analytical framework to model the redistributive features of alternative pension systems when individuals face ex ante differences in mortality. Differences in life expectancy between high and low socioeconomic groups are often large and have widened recently in many countries. Such longevity gaps affect the actuarial fairness and progressivity of public pension systems. However, behavioral responses to longevity and policy complicate analysis of possible reforms. Here we consider how various pension systems would perform in an OLG setting with heterogeneous longevity and ability. We evaluate redistributive effects of three Notional Defined Contribution plans and three Defined Benefit plans, calibrated on the US case. Compared to a benchmark non-redistributive plan that accounts for differences in mortality, US Social Security reduces regressivity from longevity differences, but would require group-specific life tables to achieve progressivity. Moreover, without separate life tables, despite apparent accounting gains, lower income groups would suffer welfare losses and higher income groups would enjoy welfare gains through indirect effects of pension systems on labor supply.

This paper studies retirement and child support policies in a small, open, overlapping-generations economy with PAYG social security and endogenous retirement and fertility decisions. It demonstrates that neither fertility nor retirement choices necessarily coincide with socially optimal allocation, because agents do not take into account the externalities of fertility and the elderly labor supply in the economy as a whole. It shows that governments can realize the first-best allocation by introducing a child allowance scheme and a subsidy to incentivize the labor supply of older workers. As an alternative to subsidizing the elderly labor supply, we show that the first-best allocation can also be achieved by controlling the retirement age. Finally, the model is simulated in order to study whether the policies devoted to realizing the social optimum in a market economy could be a Pareto improvement. [ABSTRACT FROM AUTHOR]

In this article we estimate the relative contributions to the gender pension gap of career duration and income earned at different points along the pension income distribution, as well as the role played by minimum pensions and other partly or wholly non-contributory policies in reducing this gap. Our research covers all retirees in France in 2012 employed in the public or private sector at least once in their lifetimes. We first highlight that at every point in the distribution, the gender pension gap is wider for private-sector retirees than for those in the public sector. This is because public sector careers are less fragmented and because the calculation of the public sector reference wage does not penalize career interruptions so heavily. This relative advantage of women in the public sector is probably an additional factor explaining their over-representation in this sector. Applying the decomposition method proposed by Firpo et al. (2007, 2009), we show that composition differences in the gender pension gap are essentially due to differences in contribution periods and wages, with a smaller effect of career duration in the public sector than in the private. In the first deciles, the gap can be attributed largely to differences in career duration. This effect gradually weakens, and differences in the reference wage become the main explanation. We also show that minimum contributory pensions play an extremely important role in limiting the gender pension gap in the first deciles, essentially in the private sector. Last, we show that in all cases the unexplained share of the pension gap is substantial only at the bottom of the distribution and, to a lesser extent, in the top decile. The unexplained share is generally smaller than the explained one and favours men. [ABSTRACT FROM AUTHOR]

This paper studies how the rates of deduction for early retirement have to be determined in pay-as-you-go (PAYG) systems in order to keep their budget stable. The derivation of these deductions requires the use of a multiperiod intertemporal budget constraint that involves assumptions about the retirement behavior of past, present, and future cohorts. In general, it is not possible to calculate budget-neutral deductions from the budget constraint of a single individual who retires before the target retirement age—an approach that dominates the related literature. Only for specific cases one can use this second approach but then one has to adjust the discount rate to the assumption about collective retirement. If there is only one deviating individual, then the right choice is the market interest rate while for a stationary retirement distribution it is the internal rate of return of the PAYG system. In this case, the necessary deductions are lower than under the standard approach. This is also true for retirement ages that fluctuate randomly around a stationary distribution. Various long-run developments (e.g., increases in life expectancy or permanent changes in the average retirement age) might cause challenges for the sustainability of the pension system. These developments, however, can only be dealt with by adequate adjustments to the basic pension formulas and not by the use of deduction rates. [ABSTRACT FROM AUTHOR]

The pension system, together with the social assistance services form the social security system is recognized worldwide throughout the adoption of the Universal Declaration of Human Rights for the purpose of insured person compensation for damages regarding some inherent risks as: permanent or temporary inability of work, old age or unemployment. The main objectives of a pension system are decreasing poverty regarding the lower income persons throughout the conditions of limitation of the working capacity which are financially vulnerable. In this article we provide a qualitative and quantitative overview regarding the Romanian pension system structure and mechanism. The conclusions of this article highlight the need for a more comprehensive reform of this system in order to strengthen it for the new challenges still to come in the near future.

We set up an overlapping-generations model with endogenous fertility to study pensions policies in an ageing economy. We show that an increasing life expectancy may not be detrimental for the economy or the pension system itself. On the other hand, conventional policy measures, such as increasing the retirement age or changing the social security contribution rate could have undesired general equilibrium effects. In particular, both policies decrease capital per worker and might have negative effects on the fertility rate, thus exacerbating population ageing. [ABSTRACT FROM AUTHOR]

This paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from the explicit objective of adequate and stable lifelong retirement income. The proposed system also involves an insurance contract pooling longevity risks and possibly collective buffers that share systematic risks with future pension savers. The paper identifies the strengths and weaknesses of the Dutch contract design and draws lessons for other countries. [ABSTRACT FROM AUTHOR]

Pay-as-you-go state pension schemes such as that operated in the United Kingdom face growing pressures from the rising old-age dependency ratio and improvements to life expectancies. Alongside compulsory increases in the statutory retirement age, governments have used incentives to encourage workers to postpone voluntarily their exit from employment, deferring their Basic State Pension in exchange for the additional financial reward of an enhanced pension at a later point in time. The impact of pension deferral upon the sustainability of the state pension system is dependent on the interplay of short-term savings from payment delay and increased subsequent longer-term payments to pension recipients. This article presents a model that simulates the financial effect of deferral uptake on the National Insurance Fund over a 40-year projection under alternative scenarios, including current and revised post-2016 deferral incentives. The findings indicate that the recent change in enhancement rate from 10.4 per cent to 5.8 per cent will significantly impact on state pension sustainability while still providing an incentive to defer. We estimate that any reduction below 4 per cent would result in zero uptake of the deferral option, based on a rational financial choice. [ABSTRACT FROM AUTHOR]

In this paper, I study how pay-as-you-go pension systems of the notional defined contribution type can be designed such that they remain financially stable in the presence of increasing life expectancy. For this to happen three crucial parameters must be set in an appropriate way: the notional interest rate, the adjustment rate and the annuity conversion factor. I show that there exist two main approaches to implement a stable system. The first uses period-specific annuitization and indexation rates that correct for labor force increases, which are only due to rises in the retirement age which are necessary to ‘neutralize’ the increase in life expectancy. The second approach uses cohort-specific annuitization and indexation rates that are larger than in a stationary situation. This is due to the fact that a continuously increasing life expectancy leads to higher internal rates of return that can be passed on via the indexation. [ABSTRACT FROM AUTHOR]

To improve the design of the pay-out phase of DC plans, this paper proposes a new approach to structure pension products: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The synthesis of a PPR structure provides new opportunities for product innovation and for the comparison of retirement products. [ABSTRACT FROM AUTHOR]

This paper stems from the observation that there are two worldwide trends, pension reform and population ageing, and asks whether the two may be related. Exploring the cases of pension reform in different countries, we find that, although they are very different, the cases share a common characteristic: they shift risks away from workers towards those who are retired. Furthermore, population ageing, by increasing the weight of the elderly relative to working generations, raises the price of intergenerational risk sharing. Combining these findings, we argue and show formally that pension reform can be seen as a welfare-best response to population ageing. [ABSTRACT FROM AUTHOR]

Fertility has long been declining in industrialised countries and the existence of public pension systems is considered as one of the causes. This paper provides detailed evidence on the mechanism by which a public pension system depresses fertility, based on historical data. Our theoretical framework highlights that the effect of a public pension system on fertility is ex ante ambiguous while its size is determined by the internal rate of return of the pension system. We identify an overall negative effect of the introduction of pension insurance on fertility using regional variation across 23 provinces of Imperial Germany in key variables of Bismarck's pension system, which was introduced in Imperial Germany in 1891. The negative effect on fertility is robust to controlling for the traditional determinants of the first demographic transition as well as to other policy changes. [ABSTRACT FROM AUTHOR]

In economically developed countries, family support policies are undertaken by governments to raise fertility. Because of increased dependency ratios in many aging societies, governments must pay ever-increasing pension benefits. Those governments must somehow increase the number of younger people to make the pension system sustainable. This paper presents an examination of whether child allowances can raise fertility or not. This issue has been analyzed in numerous earlier studies, but this paper presents an examination of the means used to finance such a child allowance: income taxes and consumption taxes. The different means of taxation exert substantially different effects on fertility. The following results are presented herein. First, a child allowance financed by an income tax cannot always raise fertility. However, such an allowance financed by a consumption tax can always raise fertility. Second, this paper presents an examination of an optimal tax policy to maximize social welfare. An optimal child allowance and an optimal income transfer from younger people to older people differ according to whether they are financed by an income tax or by a consumption tax. [ABSTRACT FROM AUTHOR]

We estimate the crowding out of private transfers caused by 70 y Más -a public assistance program for the rural elderly in Mexico for whom family support is an important source of income. Using data from the Mexican Income and Expenditure Survey and a triple difference approach, we find that the program crowds out private gifts by 37%, and it does so mostly by reducing the probability of receiving domestic remittances. As a result, the nonlabor income of beneficiaries increases by less than their government transfers. Thus, by reducing their private support to the elderly, domestic donors are dampening the effect of the program, although not completely neutralizing it. [ABSTRACT FROM AUTHOR]

Immigration has been popularised in the economics literature as a tool that could be used to balance troubled PAYG pension systems. Pivotal research by Razin and Sadka shows that unskilled immigration can overcome the pension problem and, further, boost the general welfare in the host economy. However, a large strand of current economics research is engaged in identifying mechanisms through which unskilled immigration, while solving the pension problem, is causing undesired shifts in general welfare. This work shows that recurring unskilled immigration will not only reduce the general welfare but may also be challenging the pension system by reducing the pension benefits themselves. Further interpreting the actual data, it is suggested that immigration policies are designed either based on public finances only or in a political environment of gerontocracy. [ABSTRACT FROM AUTHOR]

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In this paper, we study a general equilibrium model with overlapping generations, endogenous fertility and public pensions. By assuming Cobb-Douglas technology and logarithmic preferences, we show that the introduction of a fertility-related component in the pay-as-you-go pension scheme may destabilise the long-term equilibrium and cause endogenous fluctuations when individuals have static expectations. The possibility of cyclical instability increases (resp. reduces) when both the subjective discount factor and relative weight of individual fertility in pay-as-you-go pensions (resp. the parents' taste for children) increase(s). Interestingly, when public pensions are contingent on the individual number of children, the financing of small-sized benefits may cause the occurrence of a flip bifurcation, two-period cycles and cycles of a higher order. In addition, we show through numerical simulations that these results hold in a more general setting with a constant inter-temporal elasticity of substitution utility function and a constant elasticity of substitution production function. Our findings identify a possible novel factor responsible for persistent deterministic fluctuations in a context of overlapping generations, while also representing a policy warning regarding the destabilising effects of fertility-related pension reforms, which are currently high in both the theoretical debate and the political agendas of several developed countries. [ABSTRACT FROM AUTHOR]

Studies using data from the early 1990s suggested that while the progressive Social Security benefit formula succeeded in redistributing benefits from individuals with high earnings to individuals with low earnings, it was much less successful in redistributing benefits from households with high earnings to households with low earnings. Wives often earned much less than their husbands. As a result, much of the redistribution at the individual level was effectively from high earning husbands to their own lower earning wives. In addition, spouse and survivor benefits accrue disproportionately to women from high income households. Both factors mitigate redistribution at the household level. It has been argued that with the increase in the labor force participation and earnings of women, Social Security now should do a better job of redistributing benefits at the household level. To be sure, when we compare outcomes for a cohort with a household member age 51 to 56 in 1992 with those from a cohort born twelve years later, redistribution at the household level has increased over time. Nevertheless, as of 2004 there still is substantially less redistribution of benefits from high to low earning households than from high to low earning individuals. [ABSTRACT FROM AUTHOR]

This study analyses the dynamics of an economy with overlapping generations, endogenous population (fertility and adult mortality), logarithmic preferences and Cobb-Douglas technology. We show that the public provision of health investments and the existence of a private system of old-age insurance (i.e., transfers from children to parents) may cause the birth and death of multiple (three) steady states, deterministic chaos and bubbling phenomena when individuals have perfect foresight. Interestingly, however, we show that periodic dynamics (cycles) or complex dynamics (chaos) and global stability of the economy can endogenously be reconciled in the model, because the rise either in public health investments or transfers from young to old people can have the potential to smooth and ultimately suppress endogenous fluctuations in the cases of existence of both a single steady state or multiple steady states. [ABSTRACT FROM AUTHOR]

This paper investigates empirically the influence of government ideology on social policy using German data. Examining the funding and the benefits of social security and public healthcare policy, my results suggest that policies implemented by governments dominated by left- and rightwing parties were similar over the 1951-2007 period. Leftwing governments, however, spent more in the 1970s and rightwing governments did so after German Reunification in 1990. Since policy convergence encourages new parties to enter the political arena, and party platforms on social policy matters are likely to undergo further changes in light of demographic change, the observed pattern may thus be a transitory phenomenon. [ABSTRACT FROM AUTHOR]

This paper discusses alternative ways to deal with the positive externalities of having children in a pay-as-you-go pension system. Family allowances are compared to introducing a fertility-related component into the pension formula. In an endogenous labor supply setting, both instruments are shown to be equivalent if general pensions are related to previous contributions. In contrast, if general pensions are of the flat-rate type, making pensions contingent on the number of children is generally preferable to family allowances because the latter creates a larger tax load on labor supply. [ABSTRACT FROM AUTHOR]

This paper reviews the development of the urban and rural old age security system in China, and discusses the challenges in the process of constructing a sustained old age security system. Although funding gaps and empty individual accounts have imposed a heavy burden on the sustainability of China's urban pension system, there is a relatively high coverage rate of 35.3 percent for urban workers. However, China's pension system provides low coverage rate for rural farmers. The more rapidly aging population and lower incomes in rural areas pose challenges to the vulnerable rural household support system. The separation of the old age security system between rural and urban areas also puts great pressure as a result of urbanization on farmers who lose their farmland. Therefore, it is urgent for China to speed up the reform of its old age security system to provide an institutional support for its economic and social transition. (Edited by Zhinan Zhang) [ABSTRACT FROM AUTHOR]