Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-25T19:59:49.407Z Has data issue: false hasContentIssue false
  • English
  • Français

Demography and provisions for retirement: the pension composition, a behavioral approach

Published online by Cambridge University Press:  01 March 2021

Bernard M.S. Van Praag  and
J. Peter Hop
Bernard M.S. Van Praag*
Affiliation:
Tinbergen Institute, University of Amsterdam, CESifo, IZA, Amsterdam, The Netherlands
J. Peter Hop
Affiliation:
Tinbergen Institute, University of Amsterdam, CESifo, IZA, Amsterdam, The Netherlands
*
*Corresponding author. E-mail: [email protected]
Get access

Abstract

Pensions may be provided for in a modern society by a mix of several methods, namely by voluntary individual savings, mandatory fully-funded occupational pension systems, mandatory social security financed by pay-as-you-go, and old-fashioned hoarding in cash. We call a specific mixture of the four systems a pension composition. We assume that individual workers decide on their own individual savings, that the fully-funded occupational system is decided upon by the age cohort of the median worker, and that social security is decided upon by the median voter. We assume that individual and collective pension savings are the only sources of capital supply. When capital supply equals demand from industry, there is equilibrium in the capital market with a corresponding equilibrium interest rate and pension composition. In this paper, we assume a demography with one hundred age brackets and we investigate how changes in the birth rates, survival rates, and the retirement age affect the pension composition and the capital market equilibrium. Our conclusion is that for a given technology, the pension composition and the interest rate are determined by the demography and cannot be modified at will as a long-term political instrument.

Keywords

Demographyfunded pensionsindividual savingsinterest rateoverlapping generationssocial securityunfunded pensionsH55H75J1J26
Type
Research Paper
Information
Journal of Demographic Economics , Volume 87 , Issue 1 , March 2021 , pp. 1 - 31
Copyright
Copyright © Université catholique de Louvain 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aaron, Henry (1966) The social insurance paradox. Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique 32, 371–374.CrossRefGoogle Scholar
Alonso-García, J. and Devolder, P. (2016) Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model. Insurance: Mathematics and Economics 70(2016), 224–236.Google Scholar
Auerbach, Alan J. and Kotlikoff, Laurence J. (1987) Dynamic Fiscal Policy. Cambridge University Press.Google Scholar
Auerbach, Alan J. and Lee, Ronald (2011) Welfare and generational equity in sustainable unfunded pension systems. Journal of Public Economics 95(1–2), 16–27.CrossRefGoogle ScholarPubMed
Ball, Laurence and Mankiw, N. Gregory (2007) Intergenerational risk sharing in the spirit of arrow, Debreu, and Rawls, with applications to social security design. Journal of Political Economy 115(4), 523–547.CrossRefGoogle Scholar
Barr, Nicholas and Diamond, Peter (2006) The economics of pensions. Oxford Review of Economic Policy 22, 15–39.CrossRefGoogle Scholar
Beetsma, Roel M.W.J. and Bovenberg, A. Lans (2007) Pension Systems, Intergenerational Risk Sharing and Inflation, CEPR Discussion Paper No. DP6089, February 2007.Google Scholar
Bijlsma, Michiel, Van Ewijk, Caspar and Haaijen, Ferry (2014) Economic growth and funded pension systems, Central Planning Bureau, DP 07/2014–030, The Hague.CrossRefGoogle Scholar
Boeri, Tito, Bovenberg, Lans, Coeuré, Benoit and Roberts, Andrew (2006), Dealing with the New Giants: Rethinking the Role of Pension Funds. Centre for Economic Policy Research, London. http://www.cepr.org/pubs/books/P182.asp.Google Scholar
Bohn, Henning (2003) Intergenerational Risk Sharing and Fiscal Policy, UCSB Department of Economics Working Paper.Google Scholar
Boldrin, Michele and Rustichini, Aldo (2000) Political equilibria with social security. Review of Economic Dynamics 3, 41–78.CrossRefGoogle Scholar
Booij, Adam and Van Praag, Bernard M.S. (2009) A simultaneous approach to the estimation of risk and time preferences. Journal of Economic Behavior and Organization 70(1–2), 374–388.CrossRefGoogle Scholar
Börsch-Supan, Axel H. and Ludwig, Alexander (2010) Old Europe Ages: Reforms and Reform Backlashes, NBER Working Paper 15744, SSRN: http://www.nber.org/papers/w15744Google Scholar
Bovenberg, Lans, and Nijman, Theo (2009) Developments in pension reform: the case of Dutch stand-alone collective pension schemes. International Tax and Public Finance 16(4), 443–467.CrossRefGoogle Scholar
Breyer, Friedrich and Stolte, Klaus (2001) Demographic change, endogenous labor supply and the political feasibility of pension reform. Journal of Population Economics 14(3), 409–424.CrossRefGoogle Scholar
Bruce, Neil and Turnovsky, Stephen J. (2013) Social security, growth, and welfare in overlapping generations economies with or without annuities. Journal of Public Economics 101, 12–24.CrossRefGoogle Scholar
Casamatta, George, Cremer, Helmuth and Pestieau, Pierre (2000) The political economy of social security. Scandinavian Journal of Economics 102(3), 503–522.CrossRefGoogle Scholar
Cipriani, Giam Pietro (2016) Aging, retirement and pay-as-you-go pensions. Macroeconomic Dynamics 22, 1173–1183, vol. 18, pp. 93–113.CrossRefGoogle Scholar
Conesa, Juan Carlos and Krueger, Dirk (1999) Social security reform with heterogeneous agents. Review of Economic Dynamics 2(4), 757–795.CrossRefGoogle Scholar
Conference Board (2010) The 2010 Institutional Investment Report Trends in Asset Allocation and Portfolio Composition.Google Scholar
Cooley, Thomas F. and Soares, Jorge (1999a) A positive theory of social security based on reputation. Journal of Political Economy 107, 135–160.CrossRefGoogle Scholar
Cooley, Thomas F. and Soares, Jorge (1999b) Privatizing social security. Review of Economic Dynamics 2(3), 731–755.CrossRefGoogle Scholar
d'Albis, Hippolyte (2007) Demographic structure and capital accumulation. Journal of Economic Theory 132(1), 411–434.CrossRefGoogle Scholar
D'Amato, Marcello and Galasso, Vincenzo (2010) Political intergenerational risk sharing. Journal of Public Economics 94(9–10), 628–637.CrossRefGoogle Scholar
Demange, Gabrielle (2005) On Sustainable Pay-As-You-Go Systems, CEPR Discussion paper, no. 4966, available at SSRN: http://ssrn.com/abstract=771490.Google Scholar
Donald, Bell, and Hill, Diane (1984) How social security payments affect private pensions. Monthly Labor Review 107(5), 15–20.Google Scholar
Feldstein, Martin (1997) Transition to a Fully Funded Pension System: Five Economic Issues, NBER, w.p. 6149.CrossRefGoogle Scholar
Galasso, Vincenzo (1999) The U.S. social security system: what does political sustainability imply? Review of Economic Dynamics 2, 698–730.CrossRefGoogle Scholar
Galasso, Vincenzo (2008) Postponing retirement: the political effect of aging. Journal of Public Economics 92, 2157–2169.CrossRefGoogle Scholar
Galasso, Vincenzo and Profeta, Paola (2002) The political economy of social security: a survey. European Journal of Political Economy 18, 1–29.CrossRefGoogle Scholar
Galasso, Vincenzo and Profeta, Paola (2004) Lessons for an aging society: the political sustainability of social security systems. Economic Policy 19, 63–115.CrossRefGoogle Scholar
Gandelman, Nestor and Hernandez-Murillo, Ruben (2015) Risk aversion at the country level. Federal Reserve Bank of St. Louis Review 97(1), 53–66.Google Scholar
Gollier, Christian (2008) Intergenerational risk-sharing and risk-taking of a pension fund. Journal of Public Economics 92(5–6), 1463–1485.CrossRefGoogle Scholar
Gonzalez-Eiras, Martin and Niepelt, Dirk (2007) Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium, CEPR Discussion Paper No. DP6581.Google Scholar
Gordon, Roger H. and Varian, Hal R. (1988) Intergenerational risk sharing. Journal of Public Economics 37(2), 185–202.CrossRefGoogle Scholar
Heijdra, Ben and Mierau, Jochen (2011) The individual life cycle and economic growth: an essay on demographic macroeconomics. De Economist 159(1), 63–87.CrossRefGoogle Scholar
Helmuth, Cremer, De Donder, Philippe, Maldonado, Dario and Pestieau, Pierre (2009) Forced saving, redistribution, and nonlinear social security schemes. Southern Economic Journal 76, 86–98.Google Scholar
Karabarbounis, Loukas and Neiman, Brent (2014) The global decline of the labor share. The Quarterly Journal of Economics 129(1), 61–103.CrossRefGoogle Scholar
Knell, Markus (2010) The optimal mix between funded and unfunded pension systems when people care about relative consumption. Economica New Series 77(308), 710–733.CrossRefGoogle Scholar
Krueger, Dirk and Ludwig, Alexander (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
Lee, Ronald (2016) Macroeconomics, aging and growth. Chapter 2 In Piggott, John and Woodland, Alan (eds), Handbook of the Economics of Population Ageing, pp. 59–118. Elsevier, Prepublication Version is NBER Working Paper w22310 (June, 2016).Google Scholar
Lee, Ronald and Mason, Andrew (2010) Some macroeconomic aspects of global population aging. Demography 47(suppl. 1), S151–S172.CrossRefGoogle ScholarPubMed
Leslie, P.H. (1945) The use of matrices in certain population mathematics. Biometrika 33(3), 183–212.CrossRefGoogle ScholarPubMed
Lindbeck, Assar and Persson, Mats (2003) The gains from pension reform. Journal of Economic Literature 41, 72–112.CrossRefGoogle Scholar
Lotka, A.J (1907) Relations between birth rates and death rates. Science New Series 26(653), 21–22.CrossRefGoogle Scholar
Mateos-Planas, Xavier (2008) A quantitative theory of social security without commitment. Journal of Public Economics 92(3–4), 652–671.CrossRefGoogle Scholar
Matsen, E. and Thøgerson, Ø. (2004) Designing social security—a portfolio choice approach. European Economic Review 48(4), 383–904.CrossRefGoogle Scholar
Miles, David (1999) Modeling the impact of demographic change upon the economy. Economic Journal 109(452), 1–36.CrossRefGoogle Scholar
Mitchell, Olivia S. (2008) ‘A review of Tito Boeri, Lans Bovenberg, Benoît Coeuré and Andrew Roberts's “Dealing with the New Giants” and Peter J. Orszag, Mark Iwry and William G. Gale's “Aging Gracefully”’. Journal of Economic Literature 46(4), 983–988.CrossRefGoogle Scholar
Nadiri, M. Ishaq and Prucha, Ingmar R. (1996) Estimation of the depreciation rate of physical and R&D capital in the U.S. Total manufacturing sector. Economic Inquiry 34, 43–56.CrossRefGoogle Scholar
OECD (2015) The Labour Share in G20 Economies. OECD Publishing, Paris.Google Scholar
OECD (2017) Pensions at a Glance. OECD Publishing, Paris.Google Scholar
Outreville, J. François (2015) The relationship between relative risk aversion and the level of education: a survey and implications for the demand for life insurance. Journal of Economic Surveys 29, 97–111.CrossRefGoogle Scholar
Piketty, Thomas (2014) Capital in the 21st Century. Harvard University Press.CrossRefGoogle Scholar
Poterba, James M. (2001) Demographic structure and asset returns. The Review of Economics and Statistics 83, 565–584.CrossRefGoogle Scholar
Rangel, Antonio and Zeckhauser, Richard J. (1999) Can market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?, Presented at the Conference on Risks Aspects of Investment Based Social Security Reform (NBER), Florida, January 15–16.CrossRefGoogle Scholar
Samuelson, Paul A. (1954) An exact consumption–loan model of interest with or without the social contrivance of money. Journal of Political Economy 66(6), 467–482; reprinted in N. Barr (ed.) (2001), Economic Theory and the Welfare State, Edward Elgar Library in Critical Writings in Economics, vol. II, 63–78.CrossRefGoogle Scholar
Shane, Frederick, Loewenstein, George and O'Donoghue, Ted (2002) Time discounting and time preference: a critical review. Journal of Economic Literature 40, 351–401.Google Scholar
Sinn, Hans Werner (2000) Why a funded pension system is needed and why it is not needed. International Tax and Public Finance 7, 389–410.CrossRefGoogle Scholar
Taake, Te Tari. (2017) General Depreciation Rates, New Zealand Inland Revenue 265.Google Scholar
Thøgersen, J. (2015) Population ageing and capital accumulation: a simple OLG model with PAYGO pensions. Theoretical Economics Letters 5, 155–162.CrossRefGoogle Scholar