political (in)stability of pension system reforms
TRANSCRIPT
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Motivation Model Results
Political (In)Stability of Social Security Reformwith Krzysztof Makarski
Joanna Tyrowicz
Faculty of Economics, University of WarsawEconomic Institute, National Bank of Poland
NIESR - 2015 - London
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Motivation Model Results
Motivation
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Motivation Model Results
Literature review
A wave of reforms: Holzman and Stiglitz (2001), Bonoli and Shikinawa (2006),Gruber and Wise (2009)Most of these reforms somehow reversed: Jarrett (2011)(At least) Some of the reversings welfare deteriorating: Hagemejer et al (2015)
Political economy of pension systems: will the reform be implementedCooley and Soares (1999), Galasso and Profeta (2002), subsequent literaturereviewed by de Waque (2005)extant literature on whether or not privatization is in fact welfare enhancing:Conesa and Kruger (1999), Nishiyama and Smetters (2007), Fehr (2009)
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Motivation Model Results
Literature review
A wave of reforms: Holzman and Stiglitz (2001), Bonoli and Shikinawa (2006),Gruber and Wise (2009)Most of these reforms somehow reversed: Jarrett (2011)(At least) Some of the reversings welfare deteriorating: Hagemejer et al (2015)Political economy of pension systems: will the reform be implemented
Cooley and Soares (1999), Galasso and Profeta (2002), subsequent literaturereviewed by de Waque (2005)extant literature on whether or not privatization is in fact welfare enhancing:Conesa and Kruger (1999), Nishiyama and Smetters (2007), Fehr (2009)
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Motivation Model Results
Goals and expectations
GoalSuppose there already is a reform, with stable long-term gains, but delayed: does iteventually become politically stable?
Expectations
With passing of the initially old cohorts, welfare gains become majoritarianIntend to understand/explain the reversing of reforms
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Motivation Model Results
Outline
1 Motivation
2 Model
3 Results
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Motivation Model Results
Agents
”born” at age 20 (j = 1) and live up to 100 years (J = 80)subject to time and cohort dependent survival probability πchoose labor supply l endogenously until exogenous retirement age J̄ (forced toretire)
optimize remaining lifetime utility derived from leisure 1− l and consumption c
Uj,t =J−j∑s=0
[δsπj+s,t+sπj,t
u(cj+s,t+s, lj+s,t+s)]
with
u(c, l) = log(cφ(1− l)1−φ)
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Motivation Model Results
Agents
”born” at age 20 (j = 1) and live up to 100 years (J = 80)subject to time and cohort dependent survival probability πchoose labor supply l endogenously until exogenous retirement age J̄ (forced toretire)
optimize remaining lifetime utility derived from leisure 1− l and consumption c
Uj,t =J−j∑s=0
[δsπj+s,t+sπj,t
u(cj+s,t+s, lj+s,t+s)]
with
u(c, l) = log(cφ(1− l)1−φ)
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Motivation Model Results
Agents
receive market clearing wage for laborreceive market clearing interest rate on private savingsreceive pension income + unintentional bequestspay taxes
Subject to the budget constraint
(1 + τ ct )cj,t + sj,t = (1− τ lt )(1− τ ι)wj,tlj,t ← labor income
+ (1 + (1− τkt )rt)sj−1,t−1 ← capital income
+ (1− τ lt )pιj,t ← pension income+ bj,t ← bequests−Υt ← lump-sum tax
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Motivation Model Results
Agents
receive market clearing wage for laborreceive market clearing interest rate on private savingsreceive pension income + unintentional bequestspay taxes
Subject to the budget constraint
(1 + τ ct )cj,t + sj,t = (1− τ lt )(1− τ ι)wj,tlj,t ← labor income
+ (1 + (1− τkt )rt)sj−1,t−1 ← capital income
+ (1− τ lt )pιj,t ← pension income+ bj,t ← bequests−Υt ← lump-sum tax
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Motivation Model Results
Firms
Perfectly competitive representative firmStandard Cobb-Douglas production function
Yt = Kαt (ztLt)1−α
Profit maximization implies
wt = zt(1− α)kαtrt = αkα−1
t − d
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Motivation Model Results
Government
collects taxes on earnings, interest and consumption (sum up to T )spends GDP fixed share of GDP on government consumption Gcollects social security contributions and pays out pensionsof DB and NDC system
subsidyt = τ ιJ̄−1∑j=1
wj,tlj,t −J∑j=J̄
pj,tNj,t
services debt D and maintains debt/GDP ratio fixedlump-sum taxes Υ adjust to satisfy the govt budget constraint
Gt + subsidyt + (1 + rt)Dt−1 = Tt +Dt + Υt
J∑j=1
Nj,t
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Motivation Model Results
Pension system
Initial steady state: defined benefit
Exogenous contribution rate τ and an exogenous replacement rate ρ
pDBJ̄,t = ρwJ̄−1,t−1lJ̄−1,t−1
indexed by 25% of total payroll growth
Reform: partially funded defined contribution
Exogenous contribution rate τ and actuarially fair individual accounts
pDCJ̄,t =accumulated sum of contributionsJ̄,t
expected remaining lifetimeJ̄,t
In PAYG: Contributions and pensions are indexed by 25% of total payroll growthIn funded part: return on capital, tax free
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Motivation Model Results
Pension system
Initial steady state: defined benefit
Exogenous contribution rate τ and an exogenous replacement rate ρ
pDBJ̄,t = ρwJ̄−1,t−1lJ̄−1,t−1
indexed by 25% of total payroll growth
Reform: partially funded defined contribution
Exogenous contribution rate τ and actuarially fair individual accounts
pDCJ̄,t =accumulated sum of contributionsJ̄,t
expected remaining lifetimeJ̄,t
In PAYG: Contributions and pensions are indexed by 25% of total payroll growthIn funded part: return on capital, tax free
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Motivation Model Results
Political economy
What happens within each vote?
Policy 1 - shift of contributions: funded ⇒ PAYGPolicy 2 - shift of pensions: annuity ⇒ benefitPolicy 3 - a combination of the two
We run these votes in subsequent yearsIf consumption equivalent positive, a cohort is in favorIf a policy gains majority, it is put in placeOrder of voting: Policy 1 vs status quo → winner vs Policy 2 → winner vsPolicy 3(tested for transitivity of preferences, holds)
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Motivation Model Results
Political economy
What happens within each vote?
Policy 1 - shift of contributions: funded ⇒ PAYGPolicy 2 - shift of pensions: annuity ⇒ benefitPolicy 3 - a combination of the two
We run these votes in subsequent yearsIf consumption equivalent positive, a cohort is in favorIf a policy gains majority, it is put in placeOrder of voting: Policy 1 vs status quo → winner vs Policy 2 → winner vsPolicy 3(tested for transitivity of preferences, holds)
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Motivation Model Results
Voting results
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Motivation Model Results
Why are reforms never stable?
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Motivation Model Results
Pension benefits (year 14 and year 44)
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Motivation Model Results
Debt share (year 14 and year 44)
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Motivation Model Results
Taxes (year 14 and year 44)
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Motivation Model Results
Shift of pensions becomes unviable quite fast
Winning scenarios
Voting year Winning scenario2014 32024 32034 12044 12054 12064 12074 12084 12154 1
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Motivation Model Results
Conclusions
We allow subsequent votes of pension system reform reversion to seek when dothey become politicall stableThe votes concern scenarios with long-run welfare deteriorating policiesWe find that
funded is never preferred to PAYGannuity becomes preferred to benefit
Our model has no political risk, business cycle, etc.Pension reform reversion is preferred always if it reduces taxes for the livingcohorts
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Motivation Model Results
Thank you for your attention!
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