Starzenie się społeczeństwa w Polsce jest faktem i system ubezpieczeń społecznych musiał w związku z tym zostać zreformowany. W 1999 roku system emerytalny zdefiniowanego świadczenia został zmieniony na system zdefiniowanej składki - czy w tej sytuacji podniesienie wieku emerytalnego wciąż jest konieczne?

1. Does social security reform reduce gains from higher retirement age?
Does social security reform reduce gains from higher retirement
age?
(with Joanna Tyrowicz and Krzysztof Makarski)
Karolina Goraus
PhD Candidate
Faculty of Economic Sciences
University of Warsaw
Warsaw Economic Seminars
07 January 2015

2. Does social security reform reduce gains from higher retirement age?
Table of contents
1 Motivation and insights from literature
2 Model setup
3 Calibration
4 Baseline and reform scenarios
5 Results
Welfare
Macroeconomic effects

3. Does social security reform reduce gains from higher retirement age?
Motivation and insights from literature
Broad picture
A scientific project at the University of Warsaw
OLG modeling of the pension system reform in Poland
Polish pension reform of 1999
the original system was a DB PAYG scheme
then introduction of a three pillar system
1 notional defined contribution (NDC) scheme ⇒ managed by Social
Insurance Fund (SIF)
2 fully funded DC (FDC) scheme ⇒ managed by Open Pension Funds (OPFs)
3 voluntary pension schemes

4. Does social security reform reduce gains from higher retirement age?
Motivation and insights from literature
Motivation
Current problems with pension systems:
increasing old-age dependency ratio
majority of pension systems fail to assure actuarial fairness
in most countries people tend to retire as early as legally allowed
Typical reform proposals
switching to individual accounts’ systems
raising the social security contributions per worker
introducing general fiscal contraction
increasing minimum eligibility retirement age (MERA)

5. Does social security reform reduce gains from higher retirement age?
Motivation and insights from literature
Literature review
Two streams of literature:
1 Answering the question about optimal retirement age (Gruber and Wise
(2007), Galasso (2008), Heijdra and Romp (2009))
2 Comparing different pensions system reforms: increasing retirement age
vs. cut in benefits/privatization of the system/... (Auerbach et al. (1989),
Hviding and Marette (1998), Fehr (2000), Boersch-Supan and Ludwig
(2010), Vogel et al. (2012))
Fehr (2000)
Macroeconomic effects of retirement age increase may depend on the existing
relation between contributions and benefits
Remaining gaps in the literature
We increase retirement age...
how the macroeconomic effects differ between various pension systems?
what happens to the welfare of different generations?

6. Does social security reform reduce gains from higher retirement age?
Motivation and insights from literature
Goals and expectations
Goal
Analyse macroeconomic and welfare implications of retirement age increase
under DB (defined benefit), NDC (notional defined contribution), and FDC
(partially funded defined contribution) systems
Tool
OLG model with first steady state calibrated to reflect Polish economy in 1999
Expectations
under DB: leisure ↓, taxes ↓, welfare?
under NDC: leisure ↓, pensions ↑, welfare?
under FDC: leisure ↓, pensions ↑, welfare?
What else makes the results less predictable? → Labor supply adjustments,
general equilibrium effects...

7. Does social security reform reduce gains from higher retirement age?
Model setup
1 Motivation and insights from literature
2 Model setup
3 Calibration
4 Baseline and reform scenarios
5 Results
Welfare
Macroeconomic effects

8. Does social security reform reduce gains from higher retirement age?
Model setup
Model structure - consumer I
is ”born” at age J = 20 and lives up to J = 100
optimizes lifetime utility derived from leisure and consumption:
U0 =
J
j=1
δj−1
πj,t−1+j uj (cj,t−1+j , lj,t−1+j ) (1)
where δ is the time discounting factor and πj,t denotes the unconditional
probability of a household of having survived from birth to age j at time
period t (accidental bequests are spreaded equally to all cohorts).
The instantaneous utility function:
u(c, l) = φ log(c) + (1 − φ) log(1 − l), (2)

9. Does social security reform reduce gains from higher retirement age?
Model setup
Model structure - consumer II
is paid a market clearing wage for labour supplied and receives market
clearing interest on private savings
is free to choose how much to work, but only until retirement age ¯J
(forced to retire)
The budget constraint of agent j in period t is given by:
(1 + τc,t )cj,t + sj,t + Υt = (1 − τl,t )(1 − τι
j,t )wj,t lj,t ← labor income (3)
+ (1 + rt (1 − τk,t ))sj,t−1 ← capital income
+ (1 − τl,t )pj,t + bj,t ← pensions and bequests

10. Does social security reform reduce gains from higher retirement age?
Model setup
Model structure - producer
Firms solve the following problem:
max
(Yt ,Kt ,Lt )
Yt − wt Lt − (rk
t + d)Kt (4)
s.t. Yt = Kα
t (zt Lt )1−α
Standard firm optimization implies:
the average market wage wt = (1 − α) Kα
t (zt Lt )−α
(there might be
heterogeneity between cohorts due to age-specific productivity,
wj,t = ωj wt )
interest rate rk
t = αKα−1
t (zt Lt )1−α
− d, where d stands for depreciation

11. Does social security reform reduce gains from higher retirement age?
Model setup
Model structure - government
collects social security contributions and pays out pensions of DB and
NDC system
subsidyt = τι
t · wt Lt −
J
j= ¯J
pj,t πj,t Nt−j (5)
collects taxes on earnings, interest and consumption + spends GDP fixed amount
of money on unproductive (but necessary) activities + services debt
Tt = τl,t (1 − τι
t )wt Lt +
J
j= ¯Jt
pι
j,t πj,t Nt−j + τc,t ct + τk,t rt sj,t−1
J
j=1
πj,t Nt−j .
(6)
Gt + subsidyι
t + rt Dt−1 = Tt + (Dt − Dt−1) + Υt
J
j=1
πj,t Nt−j . (7)
wants to maintain long run debt/GDP ratio fixed

12. Does social security reform reduce gains from higher retirement age?
Calibration
1 Motivation and insights from literature
2 Model setup
3 Calibration
4 Baseline and reform scenarios
5 Results
Welfare
Macroeconomic effects

13. Does social security reform reduce gains from higher retirement age?
Calibration
Calibration to replicate 1999 economy
Preference for leisure (φ) chosen to match participation rate of 56.8%
Impatience (δ) chosen to match interest rate of 7.4%
Replacement rate (ρ) chosen to match benefits/GDP ratio of 5%
Contributions rate (τ) chosen to match SIF deficit/GDP ratio of 0.8%
Labor income tax (τl ) set to 11% to match PIT/GDP ratio
Consumption tax (τl ) set to match VAT/GDP ratio
Capital tax set de iure = de facto

14. Does social security reform reduce gains from higher retirement age?
Calibration
Age-productivity profile - flat or ...?

15. Does social security reform reduce gains from higher retirement age?
Calibration
Final parameters
Table: Calibrated parameters
Age-productivity profile
ω - D97 ω = 1
α capital share 0.31 0.31
τl labor tax 0.11 0.11
φ preference for leisure 0.578 0.526
δ discounting rate 0.998 0.979
d depreciation rate 0.045 0.045
τ total soc. security contr. 0.060 0.060
ρ replacement rate 0.138 0.227
resulting
∆kt investment rate 21 21
r interest rate 7.4 7.4
Note: D97 denotes calibration with productivity profile according to Deaton
(1997) decomposition, ω = 1 denotes flat age productivity profile.

16. Does social security reform reduce gains from higher retirement age?
Calibration
Exogenous processes in the model
Demographics
Demographic projection until 2060, after that 80 years, and after that
“new steady state”
No of births (j=20) - from the projection, constant afterwards
Mortality rates - from the projection, constant afterwards
Productivity growth
Labor augmenting productivity parameter
Data historically, projection from AWG, after that ”new steady state”,
1.7%

17. Does social security reform reduce gains from higher retirement age?
Calibration
No of 20-year-olds arriving in the model in each period (left) and mortality
rates across time for a selected cohort
Source: EUROSTAT demographic forecast until 2060

18. Does social security reform reduce gains from higher retirement age?
Calibration
Productivity growth

19. Does social security reform reduce gains from higher retirement age?
Baseline and reform scenarios
1 Motivation and insights from literature
2 Model setup
3 Calibration
4 Baseline and reform scenarios
5 Results
Welfare
Macroeconomic effects

20. Does social security reform reduce gains from higher retirement age?
Baseline and reform scenarios
Reform of the systems
Three experiments:
1 DB with flat retirement age → DB with increasing retirement age
2 NDC with flat retirement age → NDC with increasing retirement age
3 FDC with flat retirement age → FDC with increasing retirement age
What is flat and what is increasing retirement age?
flat: 60 years old increasing:

21. Does social security reform reduce gains from higher retirement age?
Baseline and reform scenarios
Pension systems
Defined Benefit → constructed by imposing a mandatory exogenous
contribution rate τ and an exogenous replacement rate ρ
pDB
j,t =
ρt wj−1,t−1, for j = ¯Jt
κDB
t · pDB
j−1,t−1, for j > ¯Jt
(8)
Defined Contribution → constructed by imposing a mandatory exogenous
contribution rate τ and actuarially fair individual accounts
Notional
pNDC
j,t =



¯Jt −1
i=1
Πi
s=1(1+rI
t−i+s−1) τNDC
¯Jt −i,t−i
w ¯Jt −i,t−i l ¯Jt −i,t−i
J
s= ¯Jt
πs,t
, for j = ¯Jt
κDB
t · pNDC
j−1,t−1, for j > ¯Jt
(9)
Funded
pFDC
j,t =



¯Jt −1
i=1
Πi
s=1(1+rt−i+s−1) τFDC
¯Jt −i,t−i
w ¯Jt −i,t−i l ¯Jt −i,t−i
J
s= ¯Jt
πs,t
, for j = ¯Jt
(1 + rt )pFDC
j−1,t−1, for j > ¯Jt
(10)

22. Does social security reform reduce gains from higher retirement age?
Baseline and reform scenarios
Welfare analysis - like Nishiyama & Smetters (2007)
What happens within each experiment?
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the winners
4 If net effect positive ⇒ reform efficient

23. Does social security reform reduce gains from higher retirement age?
Results
1 Motivation and insights from literature
2 Model setup
3 Calibration
4 Baseline and reform scenarios
5 Results
Welfare
Macroeconomic effects

24. Does social security reform reduce gains from higher retirement age?
Results
Welfare
Is the reform efficient?
Net consumption equivalent from extending the retirement age:
Age-productivity profile DB transition to NDC transition to FDC
Deaton (1997) 9.88% 11.31% 11.81%
flat 3.70% 4.41% 4.70%
Detailed cohort effects of extending the retirement age (age-productivity
profile according to Deaton, 1997):

25. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Aggregated labor supply (in mio of individuals)

26. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Labor supply in the final steady state
Average and aggregate changes
Labor supply Labor supply with MERA increase
(no reform) j < 60 j ≥ 60 Total
Average Average Aggregate Average Aggregate
(baseline=100%) (baseline=100%)
DB 63.2% 59.6% 94.4% 71.8% 113.7%
NDC 62.0% 58.8% 94.8% 72.3% 114.7%
FDC 61.7% 59.0% 95.5% 72.2% 115.4%
Labor supply over the life cycle

27. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Capital (per effective unit of labor)

28. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Pension system deficit (as % of GDP)

29. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Discounted total pension payments per retiree (stationarized)

30. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Lump-sum tax rate (extent of fiscal adjustment for long term stable
debt/GDP ratio)

31. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Conclusions
extending the retirement age is universally welfare improving
this effect is strongly enhanced if productivity is increasing in age
agents adjust downwards the average labor supply, but the
aggregated supply increases
lower savings imply decrease in per capita capital and output

32. Does social security reform reduce gains from higher retirement age?
Results
Macroeconomic effects
Questions or suggestions?
Thank you!