Pareto Efficient Pay-as-you-go Pension Systems with Multi-Period Lives / Pareto-effiziente umlagefinanzierte Alterssicherungssysteme bei mehrperiodigem Arbeitsleben

1999 ◽  
Vol 219 (3-4) ◽  
Author(s):  
Matthias Wrede
Keyword(s):  
Pension System ◽  
Pension Scheme ◽  
Labor Income ◽  
Present Value ◽  
Overlapping Generations Model ◽  
Pension Systems ◽  
Individual Contributions ◽  
The Government ◽  
Carry Over ◽  
Pareto Improving

SummaryThis paper employs a three-period-overlapping-generations model to discuss intergenerational (in-)efficiency of a PAYG system when labor supply is endogenous. Four main results will be derived.First, a pension system is (constrained) efficient if the existing system itself and reforms are restricted to guarantee that benefits are proportional to contributions in present value terms.Second, the result does not carry over to other pension systems where the benefits of a retiree are proportional to weighted individual contributions.Third, if the actual PAYG scheme is not a second-best-optimum for some generations, a welfare improving reform is possible provided that the government is not restricted to systems with partial equivalence of contributions and benefits in present value terms. A Pareto-improving transition from the PAYG system to a fully funded system might become feasible provided that the change in the pension scheme is accompanied by an adequate compensating redistribution among generations.Fourth, partial equivalence in present value terms, which requires uniform benefit-adjusted taxation of labor income, does not ensure intergenerational efficiency in all circumstances. However, if uniform benefit-adjusted taxation were optimal, a pension system like the German PAYG system would not be intergenerationally efficient since it misses partial equivalence in present value terms.

The transition to a multi-pillar pension system: the inherent socio-economic anomaly

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ishay Wolf ◽  
Jose Maria Caridad y Ocerin
Keyword(s):  
Income Inequality ◽  
Old Age ◽  
Pension System ◽  
Economic Loss ◽  
Pension Scheme ◽  
Total Contribution ◽  
Content Type ◽  
Pension Systems ◽  
High Earning ◽  
Minimum Pension

Purpose This paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high earning cohorts do. Design/methodology/approach This paper aims to consider the individual's risk appetite, using a simple utility function, based on consumptions and discount rates in each period. This paper calibrates the model according to teh Israeli pension system as a representative of a small open developed organization for economic cooperation and development country. Israel is considered as unique case study in the pension landscape, as it implements almost pure defined contribution pension scheme with continuous trend of pension market capitalization (Giorno and Jacques, 2016). Hence, this study finds Israel suitable for examining the theoretical mix of pension scheme. That model enables exploring combined solutions for adequate old age benefits, involving the first and the second pension pillars, under fiscal constraints. Findings It comes out that for risk-averse individuals, the optimal degree of funding is negatively correlated to asset returns' volatility and positively correlated to earning decile level. The neglect of risk and individual's current earning level will thus overstate the contribution level and funded percentage from total contributions. Moreover, even in an economy with minimum government intervention, and highly developed private pension fund with high average of rate of return, the authors find it is optimal that the pension system contains a sizeable unfunded pillar. This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. Practical implications The model presented in this paper could be implemented in countries with mix pension systems, as an alternative to public social transfers or means tested, alleviating poverty and inequality in old age. Additionally, this model could raise the public awareness of the financial sustainability of the unfunded pay-as-you-go pillar to diversify financial risk in pension systems, especially for low earning cohort in society. Social implications One area of research that is particularly relevant in this context concerns the issue of alleviating poverty and income inequality. It is often stressed that the prevention of old age poverty is among the central targets of well-designed pension system (Holzmann and Hinz, 2005). The conceptualization of minimum pension guarantee used in this composition allows to clearly capturing the notion of such a poverty and social targets as an integral part of the pension system rolls. Originality/value This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. That comes to realize through the level of total contribution rates and funded share that are generally optimal for high earning cohorts but not for low earning cohorts. This paper identifies that the effect of anomaly is most significant in a market characterized with high income-inequality level. This paper finds that imposing intra-generational risk sharing instrument in the form of minimum pension guarantee can re-balance pension design among different earning cohorts. This solution demonstrates balancing effect on the entire economy.

scholarly journals The shape of the pension scheme in Poland in the light of the conventional multi-pillar typologies

2019 ◽  
Vol 44 (1) ◽  
pp. 47-65 ◽  
Author(s):  
Tomasz Jedynak
Keyword(s):  
Pension System ◽  
Pension Funds ◽  
Pension Scheme ◽  
Pension Systems ◽  
Reform Implementation ◽  
Four Levels

In recent years, a number of modifications that have a significant impact on the shape of the pension system in Poland are introduced and discussed (e.g. OFE [Open Pension Funds] reform, implementation of the PPK [Employee Capital Plans], introduction of civil pensions, etc.). The result of these changes is that the traditional, three-pillar way of presenting the shape of this system does not reflect its essence any more. On the basis of the typologies of multi-pillar pension systems proposed in the literature, the study propose a new concept for presenting the shape of the general pension system in Poland. It consists of four levels of pension security, distinguished by the criterion of the initiating subject. These levels together form the base and the supplementary part of the pension system.

scholarly journals Development of service pension policy in Latvia from 1996 until 2016

2018 ◽  
Vol 51 ◽  
pp. 03011
Author(s):  
Inese Upite ◽  
Feliciana Rajevska
Keyword(s):  
Social Insurance ◽  
Pension System ◽  
Pension Scheme ◽  
Policy Planning ◽  
Pension Policy ◽  
State Budget ◽  
Pension Schemes ◽  
Social Pension ◽  
The Social ◽  
The Government

The government made a decision to terminate the development of the service pension in 1997. However, during 1998–2016 the scope of service pension beneficiaries was extended. Thereby along with the overall social insurance pension system, the social pension scheme has been established and developed for a certain range of people funded by the state budget – the system of the service pension. The aim of the article is to explore the development of the service pension policy during 1996–2016. To accomplish it, in the framework of the study concepts related to the service pensions and the tendencies of reformation of the service pension schemes were studied. The international practice and the experience of several countries were explored, as well as the analysis of legal acts, policy planning papers and statistics was performed. The purpose of the service pension has changed and diversified, moreover, the issues regarding the service pension coverage are promoted by a group of politicians, escaping a wider discussion in public and even in the government.

scholarly journals Tax Incentives as a Part of Governments’ Applied Mechanisms for the Third Pension Pillar in Estonia, Latvia, and Lithuania

2020 ◽  
Vol 1 (14) ◽  
pp. 146-155
Author(s):  
Evija Dundure ◽  
Biruta Sloka
Keyword(s):  
Pension System ◽  
Tax Incentives ◽  
Pension Funds ◽  
Private Pension ◽  
Pension Scheme ◽  
Pension Systems ◽  
The Third ◽  
Baltic Countries ◽  
Tax Exempt ◽  
The Baltic

The main objective of the improvements to public pension systems is to create a balanced three-pillar pension structure and increase public accountability for pension capital formation. Most pension systems are based on the first two pension system pillars – mandatory contributions in the state compulsory unfunded pension scheme and the state-funded or accumulated pension scheme in pension funds. However, the pension level adequacy has been reached by adding the third pension system pillar - voluntary investments in private pension funds. Governments are private pension system policymakers by defining a legal framework and providing tax incentives for voluntary investments for retirement. In the Baltic countries – Estonia, Latvia, and Lithuania, the third pension pillar is at an early stage of its development, and as such, should be particularly stimulated. This research focuses on the tax incentives utilized by the governments of Estonia, Latvia, and Lithuania and aims to ascertain and compare the effectiveness of the tax incentive policies applied to the third pension pillar by the governments of the three Baltic countries. It questions the effectiveness of the incentive mechanisms the governments of the Baltic countries have chosen, which include involving most of the population in the private pension saving programs. The research methods used are the analysis of scientific publications on the previously conducted research, acts of legislation of Baltic countries, as well as an analytical study of statistical data on the development of voluntary pension fund contributions in Estonia, Latvia, and Lithuania. The research results indicate that the tax incentives are the mechanism to motivate the population to create savings in the third pension pillar in all three Baltic countries. However, Latvia being the country with the highest coverage rate of the third pension pillar has the most unfavorable conditions for creating savings. There are no tax incentives on returns on investment and tax-exempt withdrawals in Latvia, while Estonia and Lithuania have all positions tax-exempt. A more detailed analysis of the tax incentives at the contribution stage explains the underdeveloped third pension pillar in Lithuania, as Lithuanian personal income tax reliefs are targeted at low or medium wages or gross income. The research has highlighted the impact of tax incentives on voluntary savings for retirement in the three Baltic countries, opening a discussion about the effectiveness of governments' applied mechanisms.

scholarly journals 8.8. PECULIARITIES OF BUILDING PENSION SYSTEMS IN DEVELOPING COUNTRIES: AN EXAMPLE OF MALAYSIA

2020 ◽  
Author(s):  
С.В. Фрумина
Keyword(s):  
Developing Countries ◽  
Private Sector ◽  
Military Personnel ◽  
Pension System ◽  
Private Pension ◽  
Pension Scheme ◽  
Public Servants ◽  
Pension Systems ◽  
Retirement Accounts ◽  
Pension Schemes

В статье представлена характеристика пенсионной системы Малайзии как одной из развивающихся стран, столкнувшихся с демографическими проблемами. Автор рассматривает устоявшиеся в Малайзии пенсионные схемы: пенсионную схему для государственных служащих, для работников частного сектора, для военнослужащих, для самозанятых граждан и добровольные частные пенсионные схемы. Акцент делается на формировании пенсионных счетов. The article describes the pension system of Malaysia, as one of the developing countries faced with demographic problems. The author considers pension schemes established in Malaysia: a pension scheme for public servants, for private sector employees, for military personnel, for self-employed citizens and voluntary private pension schemes. The emphasis is on the formation of retirement accounts.

scholarly journals Contributors’ Involvement in Pension Fund Investments Decision Making and Retirees Standard of Living in University of Lagos, Nigeria

2019 ◽  
Vol 15 (4) ◽  
pp. 69
Author(s):  
Hope Nwawolo ◽  
Ngozi Nwogwugwu
Keyword(s):  
Decision Making ◽  
Pension Fund ◽  
Pension System ◽  
Academic Staff ◽  
Investment Decision ◽  
Standard Of Living ◽  
Pension Scheme ◽  
Validated Questionnaire ◽  
Investment Decision Making ◽  
The Government

Management of the pension scheme in Nigeria had been inundated with several and diverse challenges ranging from corruption and mismanagement of funds for some decades. As a result retirees were not able to access their pension benefits leading to some dying without access to their fund. The government then introduced the contributory pension system in a pension Act of 2004 which was amended in 2014, as a measure to minimize the sufferings of retirees as well as allay the fears of workers. However, the problems of pension are yet to abate and retirees are still groaning under unstable welfare. This study examined contributors’ involvement in pension funds investment decision making and retirees’ standard of living. The study adopted convergent parallel research design with population being non-academic staff of University of Lagos. The population of the study was 5098 and sample size was set at 100 respondents using Taro Yamane’s (1967) formula. Response rate of the validated questionnaire was 91%. Descriptive and inferential statistics (linear regression) were employed in analysis of data. The study found that contributors’ decision making on pension fund investment exerted a positive significant effect on retirees standard of living (β=.46, R2=0.49, t=10.57, p

Social Desirability of Earnings Tests

2008 ◽  
Vol 9 (2) ◽  
pp. 114-134 ◽  
Author(s):  
Helmuth Cremer ◽  
Pierre Pestieau ◽  
Jean-Marie Lozachmeur
Keyword(s):  
Income Tax ◽  
Pension System ◽  
Professional Activity ◽  
Labor Income ◽  
Retirement Age ◽  
Work Time ◽  
Pension Systems ◽  
Effective Age ◽  
Pension Benefits ◽  
Weekly Work

Abstract In many countries, pension systems involve some form of earnings test; i.e. an individual’s benefits are reduced if he has labor income. This paper examines whether or not such earnings tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and in their health status. The working life of an individual has two ‘endings’: an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labor income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before.We show under which conditions earnings tests emerge both under a linear and under a non-linear tax scheme. In particular, we show that earnings tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.

scholarly journals Implications of an aging population on pension systems and financial markets

2020 ◽  
Vol 2 (1) ◽  
Author(s):  
Nguyen Tristan ◽  
Stützle Ralf
Keyword(s):  
Financial Markets ◽  
Capital Market ◽  
Pension System ◽  
Aging Population ◽  
Pension Scheme ◽  
Demographic Changes ◽  
Market Returns ◽  
Pension Systems ◽  
Distribution Of Wealth ◽  
Welfare Losses

In this paper, we introduce a macroeconomic model of overlapping generations to analyze the impacts of the demographic changes as well as the interactions between pension system, bond and stock markets. Furthermore, we examine how the pension system influences the distribution of wealth, consumption and saving within generations.In the context of this model, we show a drastic decline of capital market returns due to an aging population. Moreover, we examine the impacts demographic changes can have on individuals’ welfare for an existing pay-as-you-go pension scheme. Raising the pensionable age combined with a decrease of the contributions seems to be the best policy. On the other hand, increases in contributions as a result of demographicchanges show the highest welfare losses. Taken into account the recent pension reforms in Germany, raising the retirement age or a faster transition from a pay-as-you-go pension system to a capital funded one would make sense. But it is questionable whether such a policy will be enforceable with an aging electorate.

Pension reform in france as a balance between adequacy and stability

2021 ◽  
Vol 72 (5) ◽  
pp. 95-102
Author(s):  
N. Zelenko ◽  
V. Zelenko
Keyword(s):  
Life Expectancy ◽  
Financial Stability ◽  
Pension System ◽  
Pension Scheme ◽  
Occupational Pension ◽  
Defined Benefit ◽  
Member States ◽  
Eu Member States ◽  
The Government ◽  
Pension Benefits

In this paper the authors analyze the main aspects and problems of reforming the French pension system. Most EU member states have been forced to review their system due to the coronavirus crisis, at least to make temporary adjustments. Given European aging population, declining birth rates and increased life expectancy, the associated increase in the age dependency ratio is creating tensions for underfunded defined benefit pension systems. This implicit pension debt has important macroeconomic implications. In France, the structure of the pension system provides for the existence of solidarity component, occupational pension schemes, as well as personal (which are not popular in this country). Sometimes there are significant differences in pension benefits between public and private sector workers with the same earnings, although this difference is much lower than in many other EU member states. Starting from July 1, 2017, no new pension reforms have been implemented in France, as the project proposed by the government and President Macron has received significant opposition from both trade unions and a large part of the population, as the creation of the so-called “Universal pension scheme” provides significant reduction in the rights of future retirees. In general, the choice of restrictive rules that reflect trends in wages, employment and life expectancy is critical for the proper updated system management. Preservation of the French pension system in the near future provides the increase in retirement age or extension of insurance to receive full pension benefits. The results of scientific research indicate the need to apply the adjusted strategy for further reforms, compared to their original versions. The reform proposed by the government and the president is aimed mostly at achieving long-term financial stability of the pension system. As for the adequacy of pension benefits, for some categories of citizens it can be decreased. Therefore, the reform envisages new configurations between the financial stability of the pension system along with ensuring the adequacy of the pension benefits amount.

scholarly journals Pareto-Improving Social Security Reform when Financial Markets Are Incomplete!?

2006 ◽  
Vol 96 (3) ◽  
pp. 737-755 ◽  
Author(s):  
Dirk Krueger ◽  
Felix Kubler
Keyword(s):  
Social Security ◽  
Financial Markets ◽  
Incomplete Markets ◽  
Labor Income ◽  
Crowding Out ◽  
Pareto Improvement ◽  
Overlapping Generations Model ◽  
Stochastic Production ◽  
Unfunded Social Security ◽  
Pareto Improving

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated, a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto-improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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