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.
From Luxury Escort Service Kamathipura : 9352852248 Make on-demand Arrangemen...
Ā
Efficiency versus insurance: The role for fiscal policy in social security privatization
1. Motivation Model & Calibration Results
Welfare eļ¬ects of ļ¬scal policy in reforming the
pension system
Oliwia Komada
Krzysztof Makarski & Joanna Tyrowicz
FAME|GRAPE, Warsaw School of Economics, NBP, IAAEU & University of Warsaw
PenCon, Lodz 2018
1 / 39
2. Motivation Model & Calibration Results
Motivation
Longevity ā
Pay-As-You-Go Deļ¬ned Beneļ¬ts (PAYG DB) ā ļ¬scally unstable
if not reformed (Feldstein for US: deļ¬cit +1.4pp of GDP share )
ā reform needed
Deļ¬ned Contribution (DC) immune to longevity risk (ļ¬scal side)
(Partial) funding fosters accumulation of capital
Literature
Reform : PAYG DB =ā (partially) funded DC
shift of contributions to funded pillar ā short run ļ¬nancing?
2 / 39
3. Motivation Model & Calibration Results
Motivation
in deterministic setting horse-race between
eļ¬ciency
ļ¬scal cost for cohorts paying for the reform
eļ¬ciency prevails - reform welfare improving
in stochastic setting: loss of insurance
Nishiyama & Smetters (2007, QJE) and subsequent papers:
negative welfare eļ¬ects of the reform
But:
ļ¬scal policy counteracts / reinforces redistribution
aļ¬ecting also economic eļ¬ciency (scope of distortions)
Is Nishiyama & Smetters (2007) result universal?
compare variants of ļ¬scal closures (accompanying the reform)
introduce new ļ¬scal closures
3 / 39
4. Motivation Model & Calibration Results
Literature diļ¬ers in terms of ļ¬scal closures
and do not compare across ļ¬scal closures
4 / 39
5. Motivation Model & Calibration Results
What we do
Challenge the view that in stochastic framework pension system
privatization is welfare deteriorating
Provide a systematic overview of the interaction between the
pension system reform and ļ¬scal closure
Consider new ways of ļ¬nancing the pensions system reform
tax on capital income
labor tax progression
5 / 39
6. Motivation Model & Calibration Results
Preview of the results
Nishiyama & Smetters (2007) result is NOT universal ā ļ¬scal
closure matters
Depending on the ļ¬scal closure in stochastic framework:
welfare eļ¬ect of the same reform can be positive or negative
with political support or not
Welfare gains and political support only sometimes overlap
there are many combinations of ļ¬scal policy that make pension
system reform welfare improving
public debt often ābuysā political support for the reform (both
improving and deteriorating)
6 / 39
7. Motivation Model & Calibration Results
Contents
1 Motivation
2 Model & Calibration
3 Results
7 / 39
8. Motivation Model & Calibration Results
Model & Calibration
Standard OLG model
Consumers face uncertain life span (up to 20 periods = 100
years), earnings subject to idiosyncratic shocks, uninsurable,
consumers work until retirement age, contributing to the social
security and paying taxes (on labor income, capital income and
consumption).
Competitive producers with a standard CD production function
Government collects taxes, ļ¬nances government expenditure and
services the debt, balances pension system ā ļ¬scal closure
Calibration to replicate 2015 US economy
Model solving
8 / 39
9. Motivation Model & Calibration Results
Pension system
Baseline scenario PAYG DB
equal beneļ¬t for whole cohort (provides insurance)
b ĀÆJ,t = Ļ Ā· wavg,t
indexed with payroll growth rate (GE labor ā ā beneļ¬ts ā)
longevity ā creates deļ¬cit (no balancing mechanism in a system)
Reform scenario partially funded DC
contributions go into PAYG and funded pillar: Ļt = ĻI
t + ĻII
t
individual pension accounts ā no insurance
b ĀÆJ,t =
accrued āsavingsā
life expectancyt
+
accrued savings
life expectancyt
Reform generates a deļ¬cit in the pension system ā
need for ļ¬scal closure.
9 / 39
10. Motivation Model & Calibration Results
Fiscal closures
Three new closures details
progressive labor tax ā working cohorts with favorable shocks ā
labor supply
capital tax (+ debt) ā cohorts with more wealth ā savings &
investment
Two closures within pension system details
contributions ā working cohorts ā labor supply
pensions ā on retirees ā consumption
Four closures outside pension system details
consumption tax (+ debt) ā all cohorts ā consumption
labor tax (+ debt) ā working cohorts ā labor supply
In total: 9 closures (and a 81 possible combinations of ļ¬scal policy
in baseline and reform)
10 / 39
11. Motivation Model & Calibration Results
Contents
1 Motivation
2 Model & Calibration
3 Results
11 / 39
12. Motivation Model & Calibration Results
Baseline: PAYG DB with aging and thus deļ¬cit
Adjustment in pension
parameters
contribution rate ā from 7.8% to 9%
tax on pensions ā from 0.0% to
17.3%
Adjustment in ļ¬scal
parameters
pension system deļ¬cit ā
by 1pp of GDP
12 / 39
13. Motivation Model & Calibration Results
Reform: partially funded DC
capital labor
Pension system deļ¬cit temporary ā from 0% to 2% of GDP
13 / 39
14. Motivation Model & Calibration Results
Major eļ¬ects of the reform
Links pensions to contributions
1 Eļ¬ciency gain
2 Loss of insurance
Necessitates ļ¬scal adjustment
1 Aļ¬ects degree of eļ¬ciency gain
2 Aļ¬ects degree of insurance loss
14 / 39
15. Motivation Model & Calibration Results
Welfare analysis - like Nishiyama & Smetters (2007)
What happens within each experiment?
1 Run no policy reform scenario ā baseline
2 Run policy reform scenario ā reform
3 For each cohort compare utility, compensate the losers from the
winners
4 If net eļ¬ect positive ā reform eļ¬cient
15 / 39
16. Motivation Model & Calibration Results
Result 1: insurance is small & eļ¬ciency is large
capital tax: the highest welfare
gain due to eļ¬ciency
progression: the smallest welfare
loss due to insurance
16 / 39
17. Motivation Model & Calibration Results
Result 2: loss of insurance important but not decisive
other closure Ļk has larger gain than Ļc towards the end,
ā positive overall welfare eļ¬ect
17 / 39
18. Motivation Model & Calibration Results
Result 3: public debt help gaining political support
It helps pensioners (who gain anyway)
Young always loose (ā are against the reform)
With debt we sway some working who remain in the old system ā
majority
18 / 39
19. Motivation Model & Calibration Results
Result 3: public debt help gaining political support
Welfare eļ¬ect ā Ļk
19 / 39
20. Motivation Model & Calibration Results
Result 3: public debt help gaining political support
Welfare eļ¬ect - Ļk & debt + Ļk
20 / 39
21. Motivation Model & Calibration Results
Result 3: public debt help gaining political support
Welfare eļ¬ect - transition - Ļk & debt + Ļk
21 / 39
22. Motivation Model & Calibration Results
Aggregate welfare eļ¬ect and political support
Fiscal closure Baseline
Ļk dĻk prog. Ļ Ļb Ļc dĻc Ļl dĻl
Reform
Ļk 0.57 0.56 1.01 0.59 0.50 0.65 0.65 0.65 0.66
dĻk 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
Ļ -0.13 -0.12 0.35 0.09 0.14 -0.03 -0.02 -0.03 -0.01
Ļb -0.15 -0.14 0.33 0.07 0.13 -0.05 -0.04 -0.05 -0.03
Ļc -0.14 -0.14 0.33 0.11 0.17 -0.04 -0.03 -0.05 -0.03
dĻc -0.16 -0.16 0.31 0.09 0.15 -0.07 -0.06 -0.07 -0.05
Ļl -0.46 -0.46 0.01 -0.11 -0.03 -0.36 -0.35 -0.37 -0.35
dĻl -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
green cells refer suļ¬cient to political support
Ļk is always a good idea
little eļ¬ect of debt on welfare
prog. (almost) always better then Ļl in the reform
22 / 39
23. Motivation Model & Calibration Results
Conclusions: ļ¬scal closure DOES matter
Social security reform requires ļ¬scal adjustment
Fiscal closures redistribute and aļ¬ect eļ¬ciency, therefore
matter a lot (unnoticed in earlier literature)
Loss of Insurance important but not necessarily decisive for
evaluation of (partial) privatization
Preferred policy options
Debt closures: allow to smooth the transition burden on more
cohorts
Tax on capital income
23 / 39
25. New ļ¬scal closures
GO BACK
capital tax tax, Ļk,t
Tt = Ļl,t(1 ā Ļt)wtLt + Ļk,trtAt + Ļc,tCt + Ī„t
J
j=1
Nj,t
Gt + subsidyt + rtDt = Tt + āDt
smoothing tax adjustments with public debt
part of the costs of the reform shifted to the future generations
ļ¬scal rule
Ļk,t = (1 ā )Ļfinal
k + Ļk,tā1 + D
Dt
Yt
ā
D
Y
final
debt in the ļ¬nal steady state the same as in the initial steady state
25 / 39
26. Fiscal new closures
GO BACK
tr1 the lowest income threshold
trn is the highest income threshold
n is the number of income brackets
m is a tax multiplier such that Ļi
l,t = Ļ0
l,t ā mi
Income threshold is multiple of average labor income, (1 ā Ļt)wt
ĀÆlt.
In the initial steady state m = 1
In the transition path m = 1.15 and n = 4
26 / 39
27. Fiscal closures new in the literature
Total gross labor income (1 ā Ļt)wtLt is a sum of n + 1 components:
earnings taxed by one of n + 1 tax rate.
L0
t =
ĀÆJ
j=1
Nj,t
ā¦
min(Ļj,t(sj,t)lj,t(sj,t), tr1)dPj,t
Li
t =
ĀÆJ
j=1
Nj,t
ā¦
max(min(Ļj,t(sj,t)lj,t(sj,t ā tr1), tri ā triā1), 0)dPj,tāi = 1, ..., n
Ļ0
l,t =
Gt + subsidyt + āDt ā Ī„1
J
j=1 Nj,t ā Ļc,1Ct ā Ļk,1rtAt ā n
i=0 Li
tĻi
l
n
i=0 Li
t
Ļi
l,1 = mi
ā Ļ0
l,1
27 / 39
28. Fiscal closures within pension system
GO BACK
To keep pension system balanced government may adjust:
contribution rate Ļ
beneļ¬ts bj (as a tax on beneļ¬ts)
J
j= ĀÆJt
Nj,t(1 ā Ļb,t)bj,t = Ļt ĀÆwtLt and subsidyt = 0
28 / 39
29. Fiscal closures outside pension system, subsidyt = 0
GO BACK
consumption tax, Ļc,t
labor tax, Ļl,t
Tt = Ļl,t(1 ā Ļt)wtLt + Ļk,trtAt + Ļc,tCt + Ī„t
J
j=1
Nj,t
Gt + subsidyt + rtDt = Tt + āDt
smoothing tax adjustments with public debt
part of the costs of the reform shifted to the future generations
ļ¬scal rule ā tax ā {l, c}
Ļtax,t = (1 ā )Ļfinal
tax + Ļtax,tā1 + D
D
Y t
ā
D
Y
final
debt in the ļ¬nal steady state the same as in the initial steady state
29 / 39
30. Proļ¬le of average consumption for Ļk closure
other closures
in line with Gourinchas & Parker (2002, Econometrica) 30 / 39
38. GO BACK
Ļk debt + Ļk progression
Ļ Ļl debt + Ļl
Ļb Ļc debt +Ļc
38 / 39
39. Model solving
GO BACK
Gauss-Seidel iterative algorithm
Guess an initial value for k = K/(zL) and compute prices
Solve individual problem and aggregate it to ļ¬nd new K and L ,
thus k
iterate until convergence
Consumer problem (backward policy function iterations)
implicit tax to reduce state space, Butler (2002)
policy function iterations with picewise linear interpolation
within period problem solved with Newton-Raphson
given initial distribution at age j = 1, transition matrix for
idiosyncratic productivity and the policy functions compute the
distribution in any successive age j.
aggregation done with Gaussian quadrature
Transition path, goes between the initial and ļ¬nal steady state
39 / 39