Intragenerational Redistribution Research Articles

Measuring intra-generational redistribution in PAYG pension schemes

Voters in ageing societies expect pension reforms to be both inter-generationally and intra-generationally fair. In this paper, we propose a global measure of intra-generational redistribution in pay-as-you-go pension schemes as a basis for voters’ evaluations of reforms. Our novel index only requires information on contributions by and pension benefits paid to retirees, enabling us to measure intra-generational redistribution isolated from possible inter-generational redistribution. We rely on the contribution records of approximately 100,000 Germans, who progressed into retirement in 2007–2015, to measure the level of intra-generational redistribution in the German statutory pension scheme (GRV). A recent reform of the childcare benefit provision, which became effective in 2014, confirms the predictions of our index. The reform introduced additional benefits for a substantial subgroup of German mothers, owing to which the index value for women, but not for men, jumps up. Our findings suggests that GRV fulfills the ideal of a Bismarckian pension system without intra-generational redistribution for men, while women benefit significantly from intra-generational redistribution.

Fairness and annuity divisors for notional defined contribution pension schemes

AbstractThe use of a gender-neutral annuity divisor introduces an intra-generational redistribution from short-lived towards long-lived individuals; this entails a transfer of wealth from males to females and from low socioeconomic groups to high socioeconomic groups. With some subpopulations consisting of females from low socioeconomic groups (or males from high groups), the net effect of the redistribution is unclear. The study aims to quantify the lifetime income redistribution of a generic NDC system using two types of divisor – the demographic and the economic – to compute the amount of an initial pension. With this in mind, the redistribution (actuarial fairness) among subpopulations is assessed through the ratio between the present value of expected pensions received and contributions paid. We find that all subgroups of women and men with high educational attainment benefit from the use of the unisex demographic divisor. This paper also shows that the value of the economic divisor depends markedly on population composition. When mortality differentials by gender and level of education are considered, economic divisors are mostly driven by the longevity effect corresponding to gender.

Coordinating intergenerational redistribution and the repayment of public debt: an experimental test of Tabellini (1991)

Is there a link between public debt and wealth inequality? Could government bondholders use intra-generational redistribution strategically to make the repayment of debt politically viable? We reconsider the model of Tabellini (J Polit Econ 99:335–357, 1991) and expose the role of coordination and divide-and-conquer. By coordinating their bond investments, the old generation splits up the young generation and secures a majority favoring debt repayment. Coordination therefore mediates the impact of wealth inequality on public debt. We test the model in a laboratory experiment and find that subjects often coordinate to exploit the link between inter- and intragenerational redistribution. Hence, coordination plays an important role in the strategic creation and exploitation of minorities, and thus in the accumulation of public debt.

Measuring Intra-Generational Redistribution in PAYG Pension Schemes

In this paper, we propose a novel index for measuring intra-generational redistribution in pay-as-you-go pension schemes. Our index solely requires information on contributions and pension benefits of retirees, enabling us to measure intra-generational redistribution isolated from possible inter-generational redistribution. We use contribution records of approx. 100,000 German individuals, who progressed into retirement in 2007-2015, to measure the level of intra-generational redistribution in the German statutory pension scheme (GRV). A recent reform of childcare benefit provision, which became effective in 2014, confirms the predictions of our index. The reform introduced additional benefits for a subgroup of substantial size of German mothers, due to which the index value for women, but not for men jumps up. Our findings suggests that GRV fulfils the ideal of a Bismarckian pension system without intra-generational redistribution for men, while women benefit from intra-generational redistribution.

Intragenerational redistribution in a funded pension system

AbstractIn a general equilibrium framework, this paper studies the properties, in terms of labour market distortions and capital accumulation, of three social security systems: a pay-as-you-go notional defined contribution (PAYG NDC), a fully funded (FF), and a novel modified FF (MFF) system, which includes an intragenerational redistributive component to guarantee minimum living standards to future low-income retirees. We show that while PAYG NDC depresses labour supply and physical capital accumulation, FF is neutral on both dimensions. Conversely, MFF slightly increases physical capital accumulation, without significantly reducing labour supply incentives. Moreover, it reduces the burden of future intergenerational redistribution, and increases social welfare.

National culture and the configuration of public pensions

This paper explores the determinants of public pension plan configurations. It is argued that the level of intragenerational redistribution in public pension plans is related to a country's cultural background. The level of intragenerational redistribution is measured by Krieger and Traub's Bismarckian factor. The countries’ cultural background is operationalized using cultural dimensions developed by Hofstede. The empirical results are in line with our hypotheses. Uncertainty avoidance appears to have a significant, positive association with the Bismarckian factor (low intragenerational redistribution in public pensions), whereas the relation with individualism is negative (high intragenerational redistribution). Moreover, a positive association is found between the Bismarckian factor and inflation shocks in the first half of the 20th century. While the sample size is limited, the results are robust to the inclusion of different economic, institutional, and demographic control variables as well as to using alternative model specifications. These findings have important public policy implications. We argue that pension reform proposals suggesting a transformation of public to private pension provision should consider the cultural background of countries.

Coordinating Intergenerational Redistribution and the Repayment of Public Debt

Is there a link between public debt and wealth inequality? Could government bondholders use intra-generational redistribution strategically to make the repayment of debt politically viable? Using a two-generations game-theoretic model, we identify coordination and divide-and-conquer as key factors. By coordinating their bond investments, the old generation may secure a majority favoring debt repayment. As a consequence, coordination mediates the impact of wealth inequality on public debt. Furthermore, ease of coordination offers another compelling reason why declining population growth fosters the accumulation of public debt. We test our model in a laboratory experiment and confirm the central predictions.

The welfare state and migration: A dynamic analysis of political coalitions

We develop a dynamic political–economic theory of welfare state and immigration policies, featuring three distinct voting groups: skilled workers, unskilled workers, and old retirees. The essence of inter- and intra-generational redistribution of a typical welfare system is captured with a proportional tax on labor income to finance a transfer in a balanced-budget manner. We provide an analytical characterization of political–economic equilibrium policy rules consisting of the tax rate, the skill composition of migrants, and the total number of migrants. When none of these groups enjoy a majority (50 percent of the voters or more), political coalitions will form. With overlapping generations and policy-determined influx of immigrants, the formation of the political coalitions changes over time. These future changes are taken into account when policies are shaped.

Social security and two-earner households

In the past decades, elimination of the pay-as-you-go system in U.S. has been extensively discussed and studied. Such an elimination would also eliminate the intragenerational redistribution done by the following policies of social security. Due to spousal and survivor׳s benefit provisions, US Social Security system redistributes (mostly) to single-earner married households. Since retirement benefits are a concave function of past mean earnings, the system redistributes from high earners to low earners. Finally, existence of a cap on social security taxable earnings makes the system regressive. This paper quantifies redistributive, labor supply, and welfare implications of these policies using a general equilibrium life-cycle model. Agents start out as permanently married or single and with education levels and wage profiles, where the latter depend both on education and gender. The household is the decision maker and decides on labor supply of its member(s) and saving. Elimination of these policies results in a 5.5% rise in labor force participation of married females, while increasing aggregate welfare by 0.4%. A majority of households experience positive gains in welfare. Single-earner married households incur large welfare losses (as big as 1.1%), whereas two-earner households with high skilled spouses experience substantial welfare gains (as big as 1.9%).

Sustainability of Public Finances and the Rising Costs of Long Term Care in the Netherlands

Expenditures on long term care in the Netherlands have risen substantially over the last decades. Only a part of this growth can be attributed to ageing of the population. These rising costs are one of the main concerns for sustainability of future public finances. We define long term sustainability of public finances as a situation where future generations can benefit from the same public arrangements as current generations without having to raise taxes in the future. Given this definition, growth in long term care expenditures due to changing demographics should be taken into account in determining the sustainability gap. For growth due to other factors this is less clear. When rising expenditures are related to a better quality of health services per patient in the future, it makes sense to let future generations finance this care themselves. In this paper, we evaluate different alternatives to finance additional long term care growth on top of the demographic component. We analyze these alternatives using a macro model for the long term development of the Dutch economy. We focus on the consequences of different financing schemes for the redistribution of costs and benefits between birth-cohorts. We find relatively large intragenerational redistribution of lifetime net benefits for a pay-as-yougo system or an immediate one-time increase in taxes, while a cohort-specific savings system or an “elderly tax” have relatively small intergenerational consequences. We also find that all financing options have a negative effect on labour supply and private consumption.

Implicit redistribution within Argentina’s social security system: a micro-simulation exercise

The intra-generational redistribution in the Argentinean pension program is assessed in a lifetime basis. Using household surveys, the lifetime flows of labor income, contributions and retirement benefits are simulated. Then, the expected present values of pre- and post-social security labor income are computed. The results show that the pay-as-you-go defined-benefit system appears to be regressive, especially for women in the private sector. The results are robust to the use of alternative discount rates and different definitions of pre- and post-social security wealth. When income from informal jobs is taken into account, the system becomes slightly progressive. A weak enforcement of the law makes the system less regressive. Finally, in a counterfactual scenario in which there is no informal labor, the system becomes almost neutral, even showing a small level of progressivity.

Dynamic efficiency and the two-part golden rule with heterogeneous agents

This paper studies the role of the two-part golden rule as a demarcation line between efficient and inefficient steady states in the neoclassical two-generations-overlapping model with heterogeneous agents. If agents differ regarding their labor endowment, the golden rule ceases to serve its watershed role. Except for the case where all agents’ Engel-curves are linear and identically sloped lines through the origin, some agents’ maximum utility is always associated with a capital intensity that exceeds (or falls short of) the golden rule level. If heterogeneity is introduced on the preference side, the golden rule is never optimal for all agents. These results stem from an intra-generational redistribution of resources which is entailed by the competitive markets.

Razin, Assaf, Sadka, Efraim and Suwankiri, Benjarong: Migration and the Welfare State. Political-Economy Policy Formation

The discussion about migration and the welfare state is hotly debated throughout the world. Does immigration improve or deteriorate welfare state provisions? Is the welfare state itself aggravating its problems by creating unwanted migration incentives? Does the international competition for the high skilled and the attempt to restrain the low skilled lead to a reduction in social protection? These questions are taken up in the recent book of Razin, Sadka and Suwankiri. This comprehensive approach analyses the intraand intergenerational components of the welfare state, each addressed first separately and later in combination. Also, the perspectives of both receiving and sending countries are considered. The book is organized in three parts along these different lines. A distinguishing feature of this work is its continuous political economy orientation. The interrelation of migration and intragenerational redistribution in the host country lies at the heart of Part I. Chapter 2 analyses the question how the size of welfare benefits affects the skill characteristics of immigrants. The authors consider two alternative migration policies: a free migration scenario without any skill requirements for immigrants and a restrictive regime where such requirements exist. As low skilled migrants are net beneficiaries from the welfare state and high skilled migrants are net contributors, free migration regimes should attract predominately low skilled immigration. Migration restrictions, however, should aim at attracting the high skilled and deterring the low skilled. This intuition is substantiated by a simple theoretical model and confirmed empirically by exploiting the difference between migration flows within and to the EU 15. Chapter 3 examines the relation between the skill composition of migrants and the generosity of the welfare state from the reverse angle. Natives’ incentives to maintain

Wie hat sich die intragenerationale Umverteilung in der staatlichen Säule des Rentensystems verändert? / Has Intragenerational Redistribution Become Less Important in Pension Systems’ Public Pillar?

Summary We empirically investigate whether the significance of intragenerational redistribution in the public pillar of pension systems in 20 OECD countries has changed systematically since the 1980s and whether international convergence of the degree of intragenerational redistribution can be observed. Intragenerational redistribution is measured by the Bismarckian factor which provides information about the relative importance of the earnings-benefit link in the pension formula (as compared to a flat-benefit Beveridgean pension system). Based on micro data from the Luxembourg Income Study, we find both, a trend towards (more Bismarckian) pension systems which obey the principle of participation equivalence and an international convergence of pension systems. The reduced variation of pension systems (sigma convergence) is driven by countries with a high degree of intragenerational redistribution catching up with more traditional Bismarckian countries (beta convergence). Both, fundamental pension reforms as Sweden’s and Italy’s move to „notional defined contribution‘‘ systems, and parametric reforms ranging from the removal of group-specific benefits to alternative calculations of contribution history, such as changing from „best years‘‘ to the entire worklife, underlie this development.

Vermeidung von Armut im Alter. Eine dynamische Gleichgewichtsanalyse ausgewählter Reformansätze

In the study different approaches to alleviating poverty in old age are analyzed. The most important point among the approaches is ensuring a basic income for the elderly. A couple of options are considered: (a) tax-financed basic income in addition to the statutory, pay-as-you-go funded pension system and (b) increased intragenerational redistribution within the statutory pension system. The reform-options are economically assessed by the resulting efficiency effects, which have been isolated from the caused welfare effects by appropriate compensation of the distributive effects. Following the model simulations, the approach with increased intragenerational redistribution within the statutory pension system is the superior reform-option with regard to efficiency. <bold>Zusammenfassung</bold> Der Beitrag untersucht unterschiedliche Ansätze zur Vermeidung von Armut im Alter. Kennzeichen der ausgewählten Ansätze ist eine Grundsicherung im Alter. Zwei Optionen werden betrachtet: (a) eine steuerfinanzierte Grundsicherung in Ergänzung zur gesetzlichen, im Umlageverfahren finanzierten Rentenversicherung und (b) eine Grundsicherung im Rahmen des gesetzlichen Rentenversicherungssystems mittels intragenerativer Umverteilung. Die ökonomische Beurteilung der unterschiedlichen Reformvarianten erfolgt anhand der induzierten Effizienzeffekte, die mittels geeigneter Kompensation der Verteilungseffekte aus den sich ergebenden Wohlfahrtseffekten isoliert werden. Die Modellsimulationen zeigen, daß unter Effizienzgesichtspunkten eine Grundsicherung im Rahmen der gesetzlichen Rentenversicherung, finanziert durch intragenerative Umverteilung, überlegen ist. <italic>JEL-Classifications: H55, D58, D31</italic> Received: August 27, 2009 Accepted: October 27, 2010

Postponing the legal retirement age

AbstractThis paper analyzes the reform of the pensionable age as an answer to the future financing problems of public pension systems. We use a two-staged model where, first, the government decides the redistribution level of the pension system and, secondly, individuals face a voting process on the legal retirement age. The results suggest that governments attempting to postpone the legal retirement age should increase the degree of intra-generational redistribution of the pension system in order to make the reform aimed at more easily achievable. More importantly, the most productive individuals could support some degree of redistribution to that aim.

Gesundheitspolitik – Grundrisse einer nachhaltigen und gerechten Finanzierung der Gesetzlichen Krankenversicherung / Health policy – outline for a sustainable and fair financing of Germany’s statutory health insurance

Zusammenfassung Die Finanzierung der Gesetzlichen Krankenversicherung erfolgt durch ein Umlageverfahren mit einkommensbezogenen Beiträgen. Es wird argumentiert, dass dieses System weder nachhaltig noch intergenerativ gerecht ist. Im Gegenteil, es verringert die Investitionen in Humankapital und begründet eine hohe Last für die nächste Generation. Da die intergenerative Umverteilung überzogen erscheint, wird nach einer neuen Balance zwischen Solidarität und Äquivalenz gesucht. Es wird gezeigt, dass Pauschalprämien in Kombination mit Kapitaldeckung in Form von Alterungsrückstellungen die vorhandenen Probleme reduzieren und somit zu mehr Nachhaltigkeit und intergenerativer Gerechtigkeit in der Gesetzlichen Krankenversicherung führen. Um dem Problem der intragenerativen Umverteilung gerecht zu werden, wird eine inverse Beziehung zwischen Humankapitalinvestitionen und Beiträgen zu den Alterungsrückstellungen vorgeschlagen.

On Sustainable Pay‐as‐You‐Go Contribution Rules

AbstractAn unfunded social security system faces the major risk, sometimes referred to as “political risk,” that future generations do not agree to contribute as much as expected. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each new born generation. The analysis is conducted in an overlapping generations economy that is subject to macroeconomic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors—intragenerational redistribution, risk aversion, financial markets, governmental debt—on the political sustainability of a pay‐as‐you‐go system is discussed.

Competition between unfunded systems: A European Union challenge

The first pillars of social security systems widely differ across European countries, in both the contribution rate and intra-generational redistribution. What would be the impact of these differences if European Union citizens had free access to all systems? This paper aims to highlight some basic features of this question.

Back to Bismarck? Shifting Preferences for Intragenerational Redistribution in OECD Pension Systems

Using a sample of 20 OECD countries it is shown that the majority of countries decreased the level of intragenerational redistribution in the first pillar of their pension systems, though the evidence is weak in statistical terms. We find strong correlations between changes of the so-called Bismarckian factor and changes of the generosity of the pension system, the shape of the income distribution in terms of its first three central moments and life expectancy. An economic laboratory experiment confirms that these variables could have been causal for the observed change.