Motivation Model Results
Political (In)Stability of Social Security Reform
with Krzysztof Makarski
Joanna Tyrowicz
Faculty...
Motivation Model Results
Motivation
2 / 19
Motivation Model Results
Literature review
A wave of reforms: Holzman and Stiglitz (2001), Bonoli and Shikinawa (2006),
Gr...
Motivation Model Results
Literature review
A wave of reforms: Holzman and Stiglitz (2001), Bonoli and Shikinawa (2006),
Gr...
Motivation Model Results
Goals and expectations
Goal
Suppose there already is a reform, with stable long-term gains, but d...
Motivation Model Results
Outline
1 Motivation
2 Model
3 Results
5 / 19
Motivation Model Results
Agents
”born” at age 20 (j = 1) and live up to 100 years (J = 80)
subject to time and cohort depe...
Motivation Model Results
Agents
”born” at age 20 (j = 1) and live up to 100 years (J = 80)
subject to time and cohort depe...
Motivation Model Results
Agents
receive market clearing wage for labor
receive market clearing interest rate on private sa...
Motivation Model Results
Agents
receive market clearing wage for labor
receive market clearing interest rate on private sa...
Motivation Model Results
Firms
Perfectly competitive representative firm
Standard Cobb-Douglas production function
Yt = Kα
...
Motivation Model Results
Government
collects taxes on earnings, interest and consumption (sum up to T)
spends GDP fixed sha...
Motivation Model Results
Pension system
Initial steady state: defined benefit
Exogenous contribution rate τ and an exogenous...
Motivation Model Results
Pension system
Initial steady state: defined benefit
Exogenous contribution rate τ and an exogenous...
Motivation Model Results
Political economy
What happens within each vote?
Policy 1 - shift of contributions: funded ⇒ PAYG...
Motivation Model Results
Political economy
What happens within each vote?
Policy 1 - shift of contributions: funded ⇒ PAYG...
Motivation Model Results
Voting results
12 / 19
Motivation Model Results
Why are reforms never stable?
13 / 19
Motivation Model Results
Pension benefits (year 14 and year 44)
14 / 19
Motivation Model Results
Debt share (year 14 and year 44)
15 / 19
Motivation Model Results
Taxes (year 14 and year 44)
16 / 19
Motivation Model Results
Shift of pensions becomes unviable quite fast
Winning scenarios
Voting year Winning scenario
2014...
Motivation Model Results
Conclusions
We allow subsequent votes of pension system reform reversion to seek when do
they bec...
Motivation Model Results
Thank you for your attention!
19 / 19
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Political (In)Stability of Pension System Reforms

The privatization of pension systems never becomes politically stable. Presentation from NIESR in London, UK
Published on: Mar 4, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - Political (In)Stability of Pension System Reforms

  • 1. Motivation Model Results Political (In)Stability of Social Security Reform with Krzysztof Makarski Joanna Tyrowicz Faculty of Economics, University of Warsaw Economic Institute, National Bank of Poland NIESR - 2015 - London 1 / 19
  • 2. Motivation Model Results Motivation 2 / 19
  • 3. 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) 3 / 19
  • 4. 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 literature reviewed 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) 3 / 19
  • 5. Motivation Model Results Goals and expectations Goal Suppose there already is a reform, with stable long-term gains, but delayed: does it eventually become politically stable? Expectations With passing of the initially old cohorts, welfare gains become majoritarian Intend to understand/explain the reversing of reforms 4 / 19
  • 6. Motivation Model Results Outline 1 Motivation 2 Model 3 Results 5 / 19
  • 7. 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 π choose labor supply l endogenously until exogenous retirement age ¯J (forced to retire) 6 / 19
  • 8. 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 π choose labor supply l endogenously until exogenous retirement age ¯J (forced to retire) optimize remaining lifetime utility derived from leisure 1 − l and consumption c Uj,t = J−j s=0 δs πj+s,t+s πj,t u(cj+s,t+s, lj+s,t+s) with u(c, l) = log(cφ (1 − l)1−φ ) 6 / 19
  • 9. Motivation Model Results Agents receive market clearing wage for labor receive market clearing interest rate on private savings receive pension income + unintentional bequests pay taxes 7 / 19
  • 10. Motivation Model Results Agents receive market clearing wage for labor receive market clearing interest rate on private savings receive pension income + unintentional bequests pay taxes Subject to the budget constraint (1 + τc t )cj,t + sj,t = (1 − τl t )(1 − τι )wj,tlj,t ← labor income + (1 + (1 − τk t )rt)sj−1,t−1 ← capital income + (1 − τl t )pι j,t ← pension income + bj,t ← bequests − Υt ← lump-sum tax 7 / 19
  • 11. Motivation Model Results Firms Perfectly competitive representative firm Standard Cobb-Douglas production function Yt = Kα t (ztLt)1−α Profit maximization implies wt = zt(1 − α)kα t rt = αkα−1 t − d 8 / 19
  • 12. Motivation Model Results Government collects taxes on earnings, interest and consumption (sum up to T) spends GDP fixed share of GDP on government consumption G collects social security contributions and pays out pensions of DB and NDC system subsidyt = τι ¯J−1 j=1 wj,tlj,t − J j= ¯J pj,tNj,t services debt D and maintains debt/GDP ratio fixed lump-sum taxes Υ adjust to satisfy the govt budget constraint Gt + subsidyt + (1 + rt)Dt−1 = Tt + Dt + Υt J j=1 Nj,t 9 / 19
  • 13. Motivation Model Results Pension system Initial steady state: defined benefit Exogenous contribution rate τ and an exogenous replacement rate ρ pDB ¯J,t = ρw ¯J−1,t−1l ¯J−1,t−1 indexed by 25% of total payroll growth 10 / 19
  • 14. Motivation Model Results Pension system Initial steady state: defined benefit Exogenous contribution rate τ and an exogenous replacement rate ρ pDB ¯J,t = ρw ¯J−1,t−1l ¯J−1,t−1 indexed by 25% of total payroll growth Reform: partially funded defined contribution Exogenous contribution rate τ and actuarially fair individual accounts pDC ¯J,t = accumulated sum of contributions ¯J,t expected remaining lifetime ¯J,t In PAYG: Contributions and pensions are indexed by 25% of total payroll growth In funded part: return on capital, tax free 10 / 19
  • 15. Motivation Model Results Political economy What happens within each vote? Policy 1 - shift of contributions: funded ⇒ PAYG Policy 2 - shift of pensions: annuity ⇒ benefit Policy 3 - a combination of the two 11 / 19
  • 16. Motivation Model Results Political economy What happens within each vote? Policy 1 - shift of contributions: funded ⇒ PAYG Policy 2 - shift of pensions: annuity ⇒ benefit Policy 3 - a combination of the two We run these votes in subsequent years If consumption equivalent positive, a cohort is in favor If a policy gains majority, it is put in place Order of voting: Policy 1 vs status quo → winner vs Policy 2 → winner vs Policy 3 (tested for transitivity of preferences, holds) 11 / 19
  • 17. Motivation Model Results Voting results 12 / 19
  • 18. Motivation Model Results Why are reforms never stable? 13 / 19
  • 19. Motivation Model Results Pension benefits (year 14 and year 44) 14 / 19
  • 20. Motivation Model Results Debt share (year 14 and year 44) 15 / 19
  • 21. Motivation Model Results Taxes (year 14 and year 44) 16 / 19
  • 22. Motivation Model Results Shift of pensions becomes unviable quite fast Winning scenarios Voting year Winning scenario 2014 3 2024 3 2034 1 2044 1 2054 1 2064 1 2074 1 2084 1 2154 1 17 / 19
  • 23. Motivation Model Results Conclusions We allow subsequent votes of pension system reform reversion to seek when do they become politicall stable The votes concern scenarios with long-run welfare deteriorating policies We find that funded is never preferred to PAYG annuity 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 living cohorts 18 / 19
  • 24. Motivation Model Results Thank you for your attention! 19 / 19

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