Advertisement

Pensions

  • Burkhard Heer
Chapter
Part of the Springer Texts in Business and Economics book series (STBE)

Abstract

In this chapter, we first review empirical facts of public pension systems in OECD countries. Subsequently, we introduce a public pension system in the standard two-period overlapping generations (OLG) model of Chap.  2. We consider two different social security systems, pay-as-you-go (PAYG) versus fully funded. While a fully funded pension system does not have any effect on aggregate savings if capital markets are perfect, aggregate savings fall significantly in a PAYG system. Since public pensions are likely to distort household labor supply decisions, we endogenize labor supply below. In addition, we extend the two-period model to a more realistic 70-period model in which the retirement period is smaller than the working period. Next, we derive the optimal amount of pensions in a PAYG system and study how the demographic transition and aging of the population affect the sustainability of social security. We also discuss the findings of the literature on quantitative pension studies in detail. Finally, we introduce the concept of fiscal space and point out its sensitivity with respect to the aging that takes place in many industrialized countries at present.

References

  1. Abel, A. B., Mankiw, N. G., Summers, L. H., & Zeckhauser, R. J. (1989). Assessing dynamic efficiency: Theory and evidence. Review of Economic Studies, 56, 1–20.CrossRefGoogle Scholar
  2. Alkema, L., Raftery, A. E., Gerland, P., Clark, S. J., Pelletier, F., Buettner, T., & Heilig, G. K. (2011). Probalistic projections of the total fertility rate for all countries. Demography, 48, 815–839.CrossRefGoogle Scholar
  3. Altonij, J. G., Hayashi, F., & Kotlikoff, L. (1997). Parental altruism and intervivos transfers: Theory and evidence. Journal of Political Economy, 105, 1121–1166.CrossRefGoogle Scholar
  4. Attanasio, O., Kitao, S., & Violante, G. L. (2007). Global demographic trends and social security reform. Journal of Monetary Economics, 54, 144–198.CrossRefGoogle Scholar
  5. Auerbach, A. J., & Kotlikoff, L. (1987). Dynamic fiscal policy. New York: Cambridge University Press.Google Scholar
  6. Barr, N., & Diamond, P. (2008). Reforming pensions—Principles and policy choices. Oxford: Oxford University Press.CrossRefGoogle Scholar
  7. Blanchard, O. J., & Fischer, S. (1989). Lectures on macroeconomics. Cambridge: MIT Press.Google Scholar
  8. Börsch-Sopan, A. H., & Winter, J. (2001). Population aging, savings behavior and capital markets (NBER working paper No. 8561).Google Scholar
  9. Braun, R. A., & Joines, D. H. (2015). The implications of a graying Japan for government policy. Journal of Economic Dynamics and Control, 57, 1–23.CrossRefGoogle Scholar
  10. Budría Rodriguez, S., Díaz-Giménez, J., & Quadrini, V. (2002). Updated facts on the U.S. distributions of earnings, income, and wealth. Federal Reserve Bank of Minneapolis Quarterly Review, 26, 2–35.Google Scholar
  11. Caliendo, F. N., Guo, N. L., & Hosseini, R. (2014). Social security is NOT a substitute for annuity markets. Review of Economic Dynamics, 17, 739–755.CrossRefGoogle Scholar
  12. Conesa, J. C., & Krueger, D. (1999). Social security reform with heterogeneous agents. Review of Economic Dynamics, 2, 757–795.CrossRefGoogle Scholar
  13. De Nardi, M. (2015). Quantitative models of wealth inequality: A survey (NBER Working Paper, 21106).CrossRefGoogle Scholar
  14. De Nardi, M., & Yang, F. (2016). Wealth inequality, family background, and estate taxation. Journal of Monetary Economics, 77, 130–145.CrossRefGoogle Scholar
  15. De Nardi, M., Imrohoroğlu, S., & Sargent, T. J. (1999). Projected US demographics and social security. Review of Economic Dynamics, 2, 575–615.CrossRefGoogle Scholar
  16. Fehr, H. (1999). Welfare effects of dynamic tax reforms. Tübingen: Mohr Siebeck.Google Scholar
  17. Fehr, H., Kallweit, M., & Kindermann, F. (2013). Should pensions be progressive? European Economic Review, 63, 94–116.CrossRefGoogle Scholar
  18. Fernández-Villaverde, J., & Krueger, D. (2007). Consumption over the life cycle: Facts from consumer expenditure survey data. Review of Economics and Statistics, 89(3), 552–565.CrossRefGoogle Scholar
  19. Fuster, L., İmrohoroğlu, A., & İmrohoroğlu, S. (2003). A welfare analysis of social security in a dynastic framework. International Economic Review, 44, 1247–1274.CrossRefGoogle Scholar
  20. Gerland, P., Raftery, A. E., Sevčíková, H., Li, N., Gu, D., Spoorenberg, T., Alkema, L., Fosdick, B. K., Chunn, J., Lalic, N., Bay, G., Buettner, T., Heilig, G. K., & Wilmoth, J. (2014). World population stabilization unlikely this century. Science, 346, 234–237.CrossRefGoogle Scholar
  21. Guvenen, F., Karahan, F., Ozkan, S., & Sang, J. (2015). What do data on millions of U.S. workers reveal about life-cycle earnings risk? (NBER Working Paper Series, 20913).Google Scholar
  22. Hansen, G. (1993). The cyclical and secular behavior of the labor input: Comparing efficiency units and hours worked. Journal of Applied Econometrics, 8, 71–80.CrossRefGoogle Scholar
  23. Hansen, G., & İmrohoroğlu, S. (2008). Consumption over the life cycle: The role of annuities. Review of Economic Dynamics, 11(3), 566–583.CrossRefGoogle Scholar
  24. Heer, B. (2018). Optimal pensions in aging economies. B.E. Journal of Macroeconomics, 18, 1–19.Google Scholar
  25. Heer, B., & Irmen, A. (2014). Population, pensions and endogenous economic growth. Journal of Economic Dynamics and Control, 46, 50–72.CrossRefGoogle Scholar
  26. Heer, B., & Maußner, A. (2009). Dynamic general equilibrium modeling: Computational methods and applications (2nd ed.). Heidelberg: Springer.CrossRefGoogle Scholar
  27. Heer, B., Polito, V., & Wickens, M. R. (2017). Population aging, social security and fiscal limits (CEPR Discussion Paper Series, DP11978).Google Scholar
  28. Hubbard, R. G., & Judd, K. L. (1987). Social security and individual welfare: Precautionary saving, borrowing constraints, and the payroll tax. American Economic Review, 77, 630–646.Google Scholar
  29. Huggett, M. (1996). Wealth distribution in life-cycle economies. Journal of Monetary Economics, 38, 373–396.CrossRefGoogle Scholar
  30. Hurd, M. D. (1989). Mortality risk and bequests. Econometrica, 57, 799–813.CrossRefGoogle Scholar
  31. İmrohoroğlu, S., & Kitao, S. (2009). Labor supply elasticity and social security reform. Journal of Public Economics, 93, 867–878.CrossRefGoogle Scholar
  32. İmrohoroğlu, A., İmrohoroğlu, S., & Joines, D. H. (1995). A life cycle analysis of social security. Economic Theory, 6, 83–114.CrossRefGoogle Scholar
  33. İmrohoroğlu, A., İmrohoroğlu, S., & Joines, D. H. (1999). Social security in an overlapping generations economy with land. Review of Economic Dynamics, 2, 638–665.CrossRefGoogle Scholar
  34. İmrohoroğlu, A., İmrohoroğlu, S., & Joines, D. H. (2003). Time-inconsistent preferences and social security. Quarterly Journal of Economics, 118, 745–784.CrossRefGoogle Scholar
  35. Judd, K. L. (1998). Numerical methods in economics. Cambridge: MIT Press.Google Scholar
  36. Kitao, S. (2014). Sustainable social security: Four options. Review of Economic Dynamics, 17, 756–779.CrossRefGoogle Scholar
  37. Krueger, D., & Ludwig, A. (2007). On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics, 54, 49–87.CrossRefGoogle Scholar
  38. Krueger, D., & Perri, F. (2006). Does income inequality lead to consumption inequality? Evidence and theory. Review of Economic Studies, 73, 163–193.CrossRefGoogle Scholar
  39. Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112, 443–477.CrossRefGoogle Scholar
  40. Mendoza, E. G., Razin, A., & Tesar, L. L. (1994). Effective tax rates in macroeconomics: Cross country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34, 297–323.CrossRefGoogle Scholar
  41. Nishiyama, S., & Smetters, K. (2007). Does social security privitization produce efficiency gains? Quarterly Journal of Economics, 122, 1677–1719.CrossRefGoogle Scholar
  42. OECD. (2015). Pensions at a Glance 2015: OECD and G20 indicators. Paris: OECD Publishing.Google Scholar
  43. OECD. (2017). Pensions at a Glance 2017: OECD and G20 indicators. Paris: OECD Publishing.Google Scholar
  44. Quadrini, V. (2000). Entrepreneurship, saving, and social mobility. Review of Economic Dynamics, 3, 1–40.CrossRefGoogle Scholar
  45. Raftery, A. E., Li, N., Sevčíková, H., Gerland, P., & Heilig, G. K. (2012). Bayesian probabilitic population projections for all countries. Proceedings of the National Academy of Sciences, 109, 13915–13921.CrossRefGoogle Scholar
  46. Raftery, A. E., Chunn, J., Gerland, P., & Sevčíková, H. (2013). Bayesian probabilitic projections of life expectancy for all countries. Demography, 50, 777–801.CrossRefGoogle Scholar
  47. Stokey, N., Lucas, R. E., & Prescott, E. C. (1989). Recursive methods in economic dynamics. Cambridge: Harvard University Press.Google Scholar
  48. Storesletten, K., Telmer, C. I., & Yaron, A. (1999). The risk-sharing implications of alternative social security arrangements. Carnegie-Rochester Series on Public Policy, 50, 213–259.CrossRefGoogle Scholar
  49. Storesletten, K., Telmer, C. I., & Yaron, A. (2004). Consumption and risk sharing over the business cycle. Journal of Monetary Economics, 51, 609–633.CrossRefGoogle Scholar
  50. UN (2015). World population prospects: The 2015 revision, Methodology of the United Nations population estimates and projections (ESA/P/WP. 242).Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Burkhard Heer
    • 1
  1. 1.Department of Business and EconomicsUniversity of AugsburgAugsburgGermany

Personalised recommendations