Intergenerational Redistribution Research Articles

Superannuation, Population Ageing and Living Standards in Australia

In this paper we simulate the effect of an increase in the Superannuation Guarantee Levy (SGL) by 3 per cent and 6 per cent, respectively, on average living standards. We apply the Guest-McDonald model of optimal national saving for a small open economy. The simulations account for the projected age structure of the population, the differences in productivity of workers of different ages and the differences in consumption demands of young and older consumers. In this way we account for the impact of population ageing on living standards. To the extent that an increase in the SGL increases national saving beyond what it would otherwise have been, there are two effects on living standards. One is an intergenerational redistribution of living standards from the present to future generations. The effect is to lower living standards for approximately the next 30 years after which living standards rise, compared to their levels under the benchmark scenario. However, the rise in living standards in the distant future is negligible in discounted terms. The second effect arises from the nature of the SGL as a tax on employment. This reduces employment and therefore reduces the future cash flows available to support living standards. The negative impact of this employment effect on living standards is small according to our calculations.

Intergenerational Redistribution and Labor Mobility: A Survey

Increasing labor mobility has an impact on all redistributive policy measures undertaken by national governments. This paper focuses on intergenerational redistribution, in particular PAYG financed public pension systems, and surveys some of the recent literature on this topic. Two different strands in the literature are covered: In the median-voter framework, policy outcomes depend on both the structure of the population and on the design of the public pension system. In addition, we look at the welfare-theoretical literature which addresses the harmonization of social security policies.

Finanzpolitik für die kommende Generation

Zusammenfassung Deutschland lebt seit vielen Jahren weit über seine Verhältnisse. Die kommende Generation wird die finanziellen Folgen zu tragen haben. Es geht dabei nicht nur um die hohen Fehlbeträge in den öffentlichen Haushalten, sondern auch um die Finanzierung der Sozialversicherung und der Beamtenpensionen. Obendrein werden die öffentlichen Investitionen sträflich vernachlässigt. Die intergenerative Einkommensumverteilung hat ein dramatisch hohes Ausmaß erreicht und überfordert zweifelsfrei die Kinder und Enkel. Deutsche Politiker tun im Gegensatz zu Regierungen in anderen Ländern so gut wie nichts, die Bevölkerung darüber aufzuklären, geschweige denn Schritte einzuleiten, diesen Mißstand zu beseitigen. Deutschland ist nach einer OECD-Studie das Land mit der höchsten Nachhaltigkeitslücke. Unentwegt werden neue Belastungen in der Zukunft ohne finanzielle Vorsorge eingegangen. In dem vorstehenden Aufsatz werden die finanzpolitische Ausgangslage, die sich deutlich abzeichnende weiterhin steigende Belastung der kommenden Generation und zweckmäßige Maßnahmen zum Abbau der Nachhaltigkeitslücke in den öffentlichen Finanzen dargestellt.

Economic Transition, Entrepreneurial Capacity, and Intergenerational Distribution

A defining feature of transition economies is the expansion of the private sector. Motivated by the observation that new enterprises in transition economies seem to have a strong preference for recruiting young people, this paper studies intergenerational redistribution following from market reforms that stimulate private sector activity and firm creation. We implement a theoretical model and find that in some cases more than half of the current working age population may be made worse off by an increase in entrepreneurial capacity. This may help explain why market reforms have been voted down despite their long-run benefits.

Economic Transition, Entrepreneurial Capacity, and Intergenerational Distribution

A defining feature of transition economies is the expansion of the private sector. Motivated by the observation that new enterprises in transition economies seem to have a strong preference for recruiting young people, this paper studies intergenerational redistribution following from market reforms that stimulate private sector activity and firm creation. We implement a theoretical model and find that in some cases more than half of the current working age population may be made worse off by an increase in entrepreneurial capacity. This may help explain why market reforms have been voted down despite their long-run benefits.

Parental Human Capital Investment and Old-Age Transfers from Children: Is it a Loan Contract or Reciprocity for Indonesian Families?

This paper proposes two alternative models of intergenerational transfers linking parental investment in human capital of children to old-age support. The first model formulates these transfers as a pure loan contract and the second model as self-enforcing reciprocity. Both models predict neutrality of intergenerational redistribution of resources within the family, also known as the difference in income transfer derivatives property. The two models provide different reasons for the failure of this property, and yield different policy implications for parental human capital investment and provision of old-age support. Specification tests on the Indonesian Family Life Survey data reject the pure loan model in favor of the reciprocity model. The estimated difference in income transfer derivatives for this data is found to be significantly higher than the difference estimated by Altonji, Hayashi and Kotlikoff (1997) for the U.S. PSID data.

Consumption Taxation and Endogenous Growth in a Model with New Generations

This article studies the implications of consumption taxation on capital accumulation in a one-sector endogenous growth model with finite horizons. A tax on consumption, when tax revenues are lump-sum rebated to consumers, redistributes income between living generations and future, still unborn, generations, and therefore depresses aggregate consumption and raises saving, stimulating capital accumulation and economic growth. If however the resources from taxation are used for financing unproductive public spending, the effect of the consumption tax on the endogenous growth rate disappears as no intergenerational redistribution of income occurs. Finally, a consumption tax hike accompanied by a compensatory reduction of public debt increases long-run economic growth and reduces the consumption-output ratio. Our results on consumption taxation differ substantially from those obtained within the endogenous growth literature.

Voting on Public Pensions with Hand and Feet: How Young Migrants Try to Escape from Gerontocracy

Aging changes the political power in a democracy in favor of the elder generations. Consequently, the retirees can extend the pay-as-you-go financed pensions. Under free labor mobility like within the EU, the success of gerontocracy, nevertheless, is restricted by migration of the young generations. This connection between political voting on intergenerational redistribution and voting with the feet is analyzed in a two-country model with overlapping generations. We distinguish between the case in which the young generations‘ migration decision takes its effect on future pensions into account (strategic migration) and the case in which it only reflects differentials in labor income (myopic migration). The paper also pays attention to the implications of common harmonization principles and to the consequences of price discrimination between natives and immigrants.

The Politics of Pension Reform Under Ageing

In this paper we address the question whether in case of population ageing a transition from an unfunded to a more funded pension scheme is politically feasible in a representative democracy. We consider two parties: a right-wing party which is willing to trade off intragenerational equity against efficiency gains in intergenerational redistribution, and a left-wing party which does not want to adjust the level of intragenerational distribution. We show that, in an economy with an exogenously given interest rate, only a thus defined right-wing government will propose a social-security reform. Moreover, we demonstrate that such a policy proposal may lead to electoral success if it entails an appropriate mix of distributional efficiency and equity.

Optimal intergenerational redistribution in a two-country model with endogenous fertility

We analyze a model with two countries that are linked by anintegrated capital market. Fertility, and thus population growth, isendogenously determined by households. Our analysis proceeds inthree steps: First, we characterize an optimal intertemporal andinterregional allocation in a model with endogenous fertility andtwo countries. Second, we look for an institution supporting theoptimal allocation. It turns out that in general, a decentralizedequilibrium is inefficient. National public-pension systems withbenefits that are related to the number of children implements theoptimal allocation. This provides a justification for governmentinterventions beyond its role as a ``night-watchman.'' Third, weanalyze whether national governments have the right incentives toimplement the optimal system. It turns out that every nationalgovernment has an incentive to deviate from the optimal structureand to shift part of the burden to the other country. Policyimplications for the institutional arrangements within the EuropeanUnion are discussed.

Productivity Growth and the Political Economy of Social Security

The present paper provides an analysis of unfunded social securityas the outcome of a public decision making process in an endogenousgrowth economy. It employs a model in which there is a non-monotonic relationship beween productivity growth and the scale ofpublic intergenerational redistribution. The paper shows thatalthough unfunded social security need not harm growth in general,it is likely to harm growth in a democracy. This effect isreinforced by population aging.

The Pensions Green Paper: A Generational Accounting Perspective

In this note we show how the policy proposals contained in the government's Green Paper on pensions (DSS, 1998) affect the long term sustainability of the UK's public finances and redistribution between current and future generations. Using the methodology of generational accounting we show that the proposals in the Green Paper will marginally increase the tax rise needed to ensure intertemporal solvency, and slightly worsen generational imbalances. The effect of implied changes in National Insurance Contributions, and the fiscal and generational implications of fully funding the proposed State Second Pension, are also discussed. One of the main tasks of a Welfare State is to guarantee an adequate standard of living in old age. In the United Kingdom the events of the 1980s and 1990s, namely, the decision to index benefits to prices and the various reforms to the State Earnings-Related Pension Scheme (SERPS), have ultimately paved the way for a problem of poverty in retirement (Atkinson, 1994). With the release of the Green Paper A New Contract for Welfare: Partnership in Pensions (DSS, 1998), the government has revealed its plans to reform the system of transfers to pensioners and avoid this problem. The measures in the Green Paper can be considered from a number of different angles: for example, how will they affect saving behaviour? to what extent do they redistribute between rich and poor? In this note we consider the fiscal and generational effects of the reforms: how do they affect the longterm sustainability of the public finances and intergenerational redistribution.

Capital Taxation, Tobin's q and Overlapping Generations

This study examines the effect of capital taxation on the long-term equilibrium in an intertemporal model, incorporating overlapping generations of the Blanchard–Weil type and value-maximizing firms with adjustment costs in investment. I demonstrate that an increase in capital taxation raises the steady-state expected lifetime utility of an agent born after the tax increase, provided the intergenerational redistribution effect achieved through lowering the rate of return is greater than that achieved through the tax revenue effect owing to the reduced capital–labour ratio, and that an increased ITC rate would not necessarily raise the steady-state lifetime utility of all agents. JEL Classification Numbers: D91, D92, E62, H24, H25.

Is Social Security Really Bad for Growth?

This paper develops a model of endogenous growth with overlapping generations to investigate the joint determination of social security, public investment, and growth in a small open economy. We show that a pure pay-as-you-go system with benefits indexed to wages provides taxpayers with incentives to support growth-oriented policies, which increase the future productivity of labor. We find that outcomes characterized by positive levels of intergenerational redistribution, public investment, and long-run growth can be sustained as subgame-perfect Nash equilibria of an infinitely repeated intergenerational game, if and only if the marginal productivity of public capital is large enough. Furthermore, we show that transfers comove with public investment and growth. Journal of Economic Literature Classification Numbers: E62, H55.

Gerontracy, Retirement, and Social Security

Why are the old politically successful? We build a simple interest group model in which political pressure is time-intensive, showing that in the political competitive equilibrium each group lobbies for government policies that lower their own value of time but the old do so to a greater extent and as a result are net gainers from the political process. What distinguishes the elderly from other political groups (and what makes them more succesful) is that they have lower labor productivity and/or that we are all likely to become elderly at some point, while we are relatively unlikely to change gender, race, sexual orientation, or even ocupation, The model has a variety of implications for the design of social security programs, which we test using data from the Social Security Administration. For example, the model predicts that social security programs with retirement incentives are larger and that the old are more "single-minded" in their politics, implications which we verify using cross-country government finance data and cross- country political participation surveys. Finally, we show that the forced savings programs intended to "reform" the social security system may increase the amount of intergenerational redistribution. As a model for evaluating policy reforms, ours has the attractive feature that reforms must be time time consistent from a political point of view rather than a public interest point of view.

Is Altruism Important for Understanding the Long-Run Effects of Social Security?

This paper quantifies the effects of social security on capital accumulation and wealth distribution in a life-cycle framework with altruistic individuals. The main findings of this paper are that the current U.S. social security system has a significant impact on capital accumulation and wealth distribution. I find that social security crowds out 8% of the capital stock of an economy without social security. This effect is driven by the distortions of labor supply due to the taxation of labor income rather than by the intergenerational redistribution of income imposed by the social security system. In contrast to previous analysis, I found that social security does not affect the savings rate of the economy. Another interesting finding is that even though the current U.S. social security system is progressive in its benefits, it may lead to a more dispersed distribution of wealth. Journal of Economic Literature Classification Numbers: D31, D58, E2, E6, H55, J22, J26.

Equity and Redistribution Between Generations: A Challenge for the Future of Pensions and all Social Protection Schemes

Throughout Europe today, the problems of employment and the prospects of pronounced demographic ageing combine to raise a number of questions on the future of pensions and on the underlying principles of redistribution between generations. Everywhere a new debate has arisen on intergenerational equity. It has often served as the justification for pension scheme reforms introduced or pending in most countries. Some clarification is needed on what is actually meant by intergenerational equity, all the more so with the ongoing complexity of the scientific and political arguments on the subject. In this paper I attempt to show, on the basis of information derived from my research, why a financial view of intergenerational redistribution seems inadequate and how, in discussing the future of such redistribution, there are new forms of life cycle organization and redistribution of worktime and compensated inactivity across this life cycle that need to be considered. This paper aims to show that in considering the future of pension schemes and the prospects of a contract between generations one must take into account the manner in which the distribution of work operates between all ages and across the whole life cycle, in relation to the structure of social security. Welfare states today constitute an inextricable tangle of risks and coverage systems. In such circumstances it would seem rash to countenance the kind of public pension reforms that have been envisaged by a number of member countries of the European Union, not leastFrance, without taking into account the close relationship that now exists between pensions, unemployment insurance and disability. Reform in one sector cannot meet the challenge of the ageing population in our developed societies.

Social Security in Theory and Practice (I): Facts and Political Theories

166 countries have some kind of public old age pension. What economic forces create and sustain old age Social Security as a public program? We document some of internationally and historically common features of Social Security programs including explicit and implicit taxes on labor supply, pay-as-you-go features, intergenerational redistribution, benefits which are increasing functions of lifetime earnings and not means-tested. We partition theories of Social Security into three groups: political, efficiency and narrative theories. We explore three political theories in this paper: majority rational voting model (with its two versions: the elderly as leaders of a winning coalition with poor and once and for all election model), time-intensive model of political competition and taxpayer protection model. Each of explanations is compared with international and historical facts. A companion paper explores efficiency and narrative theories, and derives implications of all theories for replacing typical pay-as-you-go system with a forced savings plan.

Should Public Pensions be Funded?

This paper outlines some of the arguments for and against the funding of public pensions, with a view to establishing whether there is an economic basis for judging it to be superior to pay‐as‐you‐go (PAYG). It is concluded that if funding has an edge over PAYG, it is not an overwhelming one. While funding may have a modest cost advantage over PAYG and have superior characteristics from the standpoint of intergenerational redistribution, its alleged superiority in handling demographic and economic risk, as well as in signalling future pension costs, is difficult to justify. While theoretical arguments tend to be consistent with the view that funding will be associated with higher saving than PAYG, convincing empirical support is missing. Nevertheless, the momentum for shifting from PAYG to funding remains. But if there is to be such a shift, there may also be a case for shifting from public to private pension provision.

Intergenerational Redistribution with Short‐lived Governments

We study the politics of intergenerational redistribution in an overlapping generations model with short-lived governments. The successive governments—who care about the welfare of the currently living generations and possibly about campaign contributions—are unable to pre-commit the future course of redistributive taxation. In a stationary politico-economic equilibrium, the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled. We find that there exist multiple stationary equilibria in many political settings. Steady-state welfare is often lower than it would be in the absence of redistributive politics.