Studies using data from the early 1990s suggested that while the progressive Social Security benefit formula succeeded in redistributing benefits from individuals with high earnings to individuals with low earnings, it was much less successful in redistributing benefits from households with high earnings to households with low earnings. Wives often earned much less than their husbands. As a result, much of the redistribution at the individual level was effectively from high earning husbands to their own lower earning wives. In addition, spouse and survivor benefits accrue disproportionately to women from high income households. Both factors mitigate redistribution at the household level. It has been argued that with the increase in the labor force participation and earnings of women, Social Security now should do a better job of redistributing benefits at the household level. To be sure, when we compare outcomes for a cohort with a household member age 51 to 56 in 1992 with those from a cohort born twelve years later, redistribution at the household level has increased over time. Nevertheless, as of 2004 there still is substantially less redistribution of benefits from high to low earning households than from high to low earning individuals.

We report analysis of voluntary switching from defined benefit (DB) to defined contribution (DC) plans in an environment best characterised as benign. Using a large Australian fund database we identify socio-demographic correlates and the macroeconomic circumstances associated with DB to DC switching. The age of participants is an important correlate of switching behaviour, suggesting a degree of risk tolerance previously not recognised in the literature. It is also noted, however, that this type of switching behaviour may involve secondary behaviour such that uncertainties of DC investment performance are managed by reference to an asset allocation formula that maps to the previous DB investment strategy.

We examine whether changes in the degree of pension funding affect economic growth. Our sample consists of 54 countries, Organization for Economic Co-operation and Development (OECD) as well as non-OECD, during 2001–10. We do not find any effect of changes in the degree of funding on growth in the short-run. For the long-run the evidence is mixed. Although a growth model with overlapping observations suggests that there is a positive effect of funding changes on economic growth, we find no effect in a simple cross-sectional model.

Chileans have limited knowledge of the pension system, its rules, and the consequences involved in their personal decisions within it. Using a variation in the household composition – having a pensioner in the household – as an instrument, we show that Chileans with greater knowledge about the pension system are more likely to have additional financial savings, but not within the voluntary pension saving plans offered by the pension system. We find that getting one additional answer right in the pension literacy survey (out of six) generates approximately a 50% additional chance that the individual will save at least in one of the surveyed periods, and a 25% additional chance that the individual will save in both surveyed periods. We also test for evidence that pension literacy affects worker choices regarding their pension savings (what we call active financial behavior). We find that more literate workers are more likely to engage in pension fund type switching and that independent workers are more likely to voluntarily enter the pension system as affiliates if they have greater pension finance literacy. Getting one additional answer right in the pension literacy survey (out of six) increases the probability of pension fund type switching by 20% and the probability of voluntary affiliation to the pension system of self-employed workers by 30%.

In a defined contribution pension system, one of the main risks faced by members refers to the investment of funds. In this context, we discuss which is the most suitable risk measurement for the affiliates to the pension system. Different life-cycle investment strategies are evaluated under this measure for different types of workers. We point out the importance of designing well-suited default investment options in light of the economic behavior of members, characterized by low financial knowledge, inertia and myopia in decision-making. We calibrate a pension risk model for the Chilean economy, including measures of life-cycle income, human capital risk, investment and annuitization risks. Our results suggest that affiliates can gain (loss) around 0.85 percentage points in terms of average replacement rates in return for an increase (decrease) of 1 percentage point in risk, measured as standard deviation of replacement rates. Using a stochastic dominance analysis, we find that there are no dominated strategies when subsidies from the Solidarity Pillar are excluded. When the Solidarity Pillar is considered, the most appropriate investment strategies for affiliates that receive these subsidies are concentrated on the riskier funds. However, this also means that there could be increased pressure on Government spending in order to grant additional benefits to affiliates. Our model has a wide range of practical applications that go from informing affiliates about the degree of uncertainty associated to their expected replacement rate to a guide to evaluate how different investment strategies affect the expected values of affiliates' pensions and their associated risk.

This paper analytically solves a life-cycle model that compares traditional and Roth retirement accounts. It includes realistic features such as tax deductibility of contributions and taxation of withdrawals, tax bracket structure with deductions, taxation of Social Security benefits, and tax risk at retirement. With current taxes, choosing a traditional account over a Roth creates small welfare losses in only a few cases, largely for those with higher incomes and pensions who are subject to the taxation of Social Security benefits. We also investigate tax variability and find that diversified strategies offer only small risk reduction benefits in our illustrations.

Redistribution is an inevitable feature of collective pension schemes and economic experiments have revealed that most people have a preference for redistribution that is not merely inspired by self-interest. However, little is known on how these preferences interact with preferences for different pension schemes. In this paper, we review the experimental evidence on preferences for redistribution and suggest some links to redistribution through pensions. For that purpose we distinguish between three types of situations. The first deals with distributional preferences behind a veil of ignorance. In the second type of situation, individuals make choices in front of the veil of ignorance and know their position. Finally, we discuss situations in which income is determined by interdependent rather than individual choices. In the closing sections of the paper, we discuss whether and how these experimental results speak to the redistribution issues of pensions. For example, do they argue for or against mandatory participation? Should we have less redistribution and more actuarial fairness? How does this depend on the type of redistribution involved?

This study examines the expected retirement replacement rates (RRs) of several cohorts of Dutch employees at the time of their planned retirements. It also computes RRs based on the available pension records. We find that the expected replacement rate (E(RR)) is, in general, higher than the ones we compute. Larger discrepancies are found for younger cohorts and for individuals with less education and working experience. We also examine the difference between the expected and computed RRs and find that the mismatch is mostly related to poor institutional knowledge. We also show the role of assumptions about institutions and wage profiles in determining our results.

Since 2002, the German government has been attempting to increase private old-age provisions by introducing incentives such as supplementary subsidies and tax credits. Since then, the so-called ‘Riester pension’ has grown in popularity. Apart from subsidized pension plans, unsubsidized private pension insurances have – already in the past – been a very important instrument among old-age provision schemes. With data of the German SAVE study for the years 2005–2009, we analyze whether the decision for a ‘Riester pension’ is independent of the decision for unsubsidized private pension insurance using methods for simultaneous equations. Our estimates indicate that decisions on ‘Riester’ and private pensions are not independent and the proposed random parameters bivariate probit model results in efficiency gains compared to separate probit estimations. Regarding governmental subsidies, we find positive incentive effects of child subsidies, whereas low income earners are not seen to increase their old-age provisions. Further, there is strong evidence for a ‘crowding-in’ among alternative assets, i.e., that individuals holding various assets make additional investments in ‘Riester pensions’ or private pension insurances. Finally, when subsidies are given, these subsidies are a clearly stronger saving motive than the aim to make provisions for old age, a result confirmed by the additional fixed-effects estimations.

Over five million state and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered. As Social Security benefits are a nonlinear function of covered lifetime earnings, the simple application of the standard benefit formula to covered earnings only would provide a higher replacement rate on those earnings than is appropriate given the individuals' total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to earnings of individuals with non-covered employment. This paper analyzes the distributional implications of the WEP and finds that it reduces benefits disproportionately for individuals with lower lifetime covered earnings. It discusses an alternative method of calculating the WEP that comes closer to preserving the intended redistribution of the system. In recognition of historical data limitations that prevent the Social Security Administration (SSA) from being able to implement this alternative method at present, the paper also analyzes two alternative ways of calculating the WEP that use the same information as the current WEP, are budget neutral, and come closer to maintaining the individual-level, cross-sectional progressivity of Social Security than does the existing WEP formula.

Pension systems' reforms are often related to a shift towards (fully or partially) defined contribution (DC) systems, in which the pension distribution reflects to a larger extent the wage distribution. In addition, relatively shorter working lives of those who have lower earnings increase the risk of receiving lower benefits. The aim of the paper is to present the changing role of a minimum pension as a tool of redistribution in the country that replaced a defined benefit (DB) pension system with a DC pension system. The old system in Poland had a significant income redistribution in the pension formula and the minimum pension was only a tool supporting this redistribution. After the introduction of the new mandatory pension system the main mechanism of redistribution (and a tool of social policy preventing poverty) is the minimum pension, financed from general taxes. According to the current rule of indexation, the minimum pension is expected to fall relative to the average wage in the economy. According to our simulations, the lack of changes of the current indexation method means that the minimum pension will fall below the International Labour Organisation (ILO) standard of the poverty protection of elderly by mid 2020s and in practice the last instrument of the poverty protection of elderly is going to disappear. However, the sole decision to change the indexation mechanism to the one based on full wage can create a significant pressure on public finance and distort incentives for prolonging work as 45% of women would be probably covered by the minimum pension guarantee (MPG). Results of simulations show that a raise and equalization of the retirement age for men and women combined with keeping a constant ratio of the minimum pension to the average (and also minimum) wage in the economy can be considered as a balanced solution that assures no further reduction of poverty protection and effective maintaining of this redistribution instrument.

Although demographic change leaves pay-as-you-go pension systems unsustainable, reforms, such as a higher pension age, are highly unpopular. This contribution looks into the role of intrinsic motivation as a driver for pension reform preferences. Theoretical reasoning suggests that this driver should be relevant as it decreases the subjective costs of a higher pension age. We test this key hypothesis on the basis of the German General Social Survey (ALLBUS). The results are unambiguous: in addition to factors such as age or education, the inclusion of intrinsic work motivation helps improving our prediction of an individual's reform orientation.

This paper estimates the fiscal burden of the Pay-As-You-Go (PAYGO) civil service pension systems that were closed in 2008 to new members in North Cyprus. Estimates are made of the difference between the present values of future contributions and the future pension benefits. The future pension benefits are those received by the individuals covered through these plans for the period from 2009 to the death of the last member in the system. The estimated unfunded cost of these historical civil service pension plans is 7.3 billion euros or 276% of GDP.

We use a large sample of defined benefit (DB) pension plans to document economically significant differences in the risk-taking of plans sponsored by privately-held versus publicly-traded firms. The magnitude and the main determinants of pension plan risk-taking are different for public and private firms. The effect of pension liabilities’ funded status on risk-taking is two and a half times higher for plans with publicly-traded sponsors than for plans with private sponsors. In contrast, changing sponsor contributions has more than four times higher effect on risk-taking for plans with private sponsors. The results suggest that the alignment of incentives for the stakeholders in a pension contract is different for plans sponsored by private versus publicly-traded firms.

The rare annuitization, thin immediate annuity market, and date limitation have prevented the attempts to analyze the longevity insurance market in Korea. The purpose of this paper is to examine the relative value of Korean annuity rates to theoretical ones and to provide a new evidence on the function of the voluntary annuity market in terms of the money's worth ratio (MWR). Our results show that the immediate annuity market in Korea is reasonably efficient. For example, the money's worth ratio of an immediate annuity of a 10-year guarantee period for a 65-year-old male is estimated to be about 0.8 with the general population mortality rate, while it improves to 0.9 with the annuitant mortality table. Average MWR is similar to that of other countries with thin annuity market, which show that annuitants in Korea pay a comparable cost to that in other countries.

In this paper, we present a preliminary estimate of the financial impact of the recent reform of the Spanish pension system. After updating the projections of pension expenditure constructed in de la Fuente and Doménech (2010) for the period 2008–2060, we analyze the impact on this variable of raising the retirement age from 65 to 67 years, extending from 15 to 25 years the period over which wages are averaged to calculate the starting pension and increasing from 35 to 37 the number of contribution years required to obtain a ‘full pension.’ Conditional on a series of assumptions about the evolution of employment, productivity and demographics, our estimates suggest that these measures will reduce pension expenditure by up to 1.4 percentage points of GDP once the reforms have been fully implemented in 2027, thereby stabilizing pension expenditure at a bit over 9% of GDP during the transition period and preventing the emergence of a structural deficit in the system before the end of the next decade. On the other hand, the existing uncertainty about the future evolution of the relevant variables suggests that it would be desirable to bring forward in time the introduction of the periodic evaluation of the system (the so-called sustainability factor) so as to have in place a mechanism that can be used to modulate the rhythm and scope of the reform if the system's financial situation requires it before the end of the transitional period.