Public and private pension spending: principles, practice and the need for reform

This paper surveys the issue of public spending on pensions. Drawing on evidence from systems around the world, but particularly in Britain, we outline the arguments for different types of public and private provision of pension income and consider how far they go towards meeting the objectives of pension provision. We discuss past trends in spending and look at future projections.

Social Spending Generosity and Income Inequality: A Dynamic Panel Approach

This paper explores whether more generous social spending polices in fact lead to less income inequality, or if redistributive outcomes are offset by behavioral disincentive effects. To account for the inherent endogeneity of social policies with regard to inequality levels, I apply the System GMM estimator and use the presumably random incidence of certain diseases as instruments for social spending levels. The regression results suggest that more social spending effectively reduces inequality levels. The result is robust with respect to the instrument count and different data restrictions. Looking at the structure of benefits, particularly unemployment benefits and public pensions are responsible for the inequality reducing impact. More targeted benefits, however, do not significantly reduce income inequality. Rather, their positive effect on pre-government income inequality hints at substantial disinctive effects.Social Benefits, Redistribution, Income Inequality, System GMM

Social Spending Generosity and Income Inequality: A Dynamic Panel Approach

This paper explores if more generous social spending polices in fact lead to less income inequality, or if redistributive outcomes are offset by behavioral disincentive effects. To account for the inherent endogeneity of social policies with regard to inequality levels, I apply the System GMM estimator and use the presumably random incidence of certain diseases as instruments for social spending levels. The regression results suggest that more social spending effectively reduces inequality levels. The result is robust with respect to the instrument count and different data restrictions. Looking at the structure of benefits, particularly unemployment benefits and public pensions are responsible for the inequality reducing impact. More targeted benefits, however, do not significantly reduce income inequality. Rather, their positive effect on pre-government income inequality hints at substantial disincentive effects.social benefits, redistribution, income inequality, System GMM

"The Changing Role of Employer Pensions: Tax Expenditures, Costs, and Implications for Middle-Class Elderly"

By any measure, pension coverage should be at an all-time high: the nation is richer and workers are older. However, the pension world is a paradox, as pension security falls for middle-class workers and pension spending increases. The United States government directly and indirectly spends more than half a trillion dollars on the elderly each year. Direct spending is mainly through Social Security and indirect spending through the tax code's special treatment of employer and personal retirement plans. The tax favoritism is an astonishing one fourth of the direct spending. But the nature of the tax subsidy is changing. The tax subsidy for 401(k) plans, which are beneficial to employers and higher-income workers, is overtaking that for traditional pensions, which cover lower-income workers and help expand pension coverage. Since tax policy is designed to meet a public purpose, perhaps the more than $100 billion dollars per year spent indirectly on pensions could be better spent? Using tax expenditure data from the federal budget and data from both employers' surveys (the Chamber of Commerce and the National Compensation Survey) and workers' surveys (the Bureau of Census's Current Population Survey), this study reflects on alternative pension polices that transform the tax subsidy and expand Social Security and traditional pensions. Such a sharp change in federal policy may stem the loss of pension security of middle-class workers and expand it for lower-income workers.

Civil-service pension schemes around the world

There are separate pension schemes for civil servants (and often for other public-sector workers) in about half of the world’s countries, including some of the largest developing economies, such as Brazil, China and India. In the higher-income, OECD countries, spending on pensions for public-sector workers makes up one quarter of total pension spending. In less developed countries, this proportion is usually higher. Yet, very little has been written on the design and reform of civil-service pension plans, especially when compared with the voluminous literature on national pension programs. This paper provides the first, detailed cross-country comparison of the terms and conditions of national and public-sector pension schemes. Civil-service schemes are typically more generous than national pension programs. Analysis of current pension spending shows that pensions for public-sector workers are a bigger burden on the government budget in developing countries than they are in higher-income economies.pensions; civil service; retirement

The Financial Circumstances of Elderly Canadians and the Implications for the Design of Canada’s Retirement Income System

It is well recognized that the incomes of the elderly are on average much lower than those of the non-elderly reflecting their limited participation in the labour market. But do the elderly have lower levels of economic well-being? Indeed, the financial circumstances of the elderly differ significantly from those of the non-elderly and these differences may compensate for lower income, increasing consumption potential relative to the non-elderly. In his paper, Malcolm Hamilton uses hitherto unexploited data from Statistics Canada’s Survey of Consumer Spending to examine the financial circumstances of the elderly and discusses the implications for the design of Canada’s retirement income system. Hamilton notes that there are five reasons why the unadjusted incomes of senior households should not be compared to those of younger households. Younger households often support children; devote a significant portion of their income to acquiring and financing consumer durables (cars, appliances, furniture) that seniors already possess; incur employment-related expenses (union dues, day-care, commuting costs, insurance); save part of their income for retirement; and pay higher taxes, including CPP and Employment Insurance (EI) premiums. Hamilton presents fascinating data for different types of households on uses of income by age group. He shows that the amount of income available for consumption, that is income after taxes, mortgage payments, savings, union dues, day-care and provision for children, is actually greater for fully retired senior couples than for prime age couples ($30,400 versus$28,600) even though average before-tax income of prime age couples is double that of senior couples. According to Hamilton, the data suggest that seniors need only around 50 per cent of their employment income to maintain their standard of living, not the 70 per cent that is commonly assumed in pension discussions. The implications of this finding for the design of the retirement system are many. Since government transfers replace 40 per cent of the income of the typical retiring Canadian, average Canadians will need little in the way of occupational pensions or retirement saving to live comfortably after 65. Most Canadians can retire in comfort if they eliminate debt and save a modest amount to supplement government pensions.Elderly, Canada, Pensions, Survey of Consumer Spending, Seniors, Spending, Savings

From Beveridge to Turner: Demography, Distribution and the Future of Pensions in the UK

This article outlines the recommendations of the UK Pensions Commission, and the data and analysis on which they were based, including projections of demographic change, trends in private pension saving, and evolution of the state pension system. The Commission concluded that without reform, structural problems with UK pensions would lead to increasingly inadequate and inequitable provision in 15-20 years time. It recommended reforms which would lead to a more generous, more universal and less means-tested state system than would otherwise evolve, and the establishment of a low cost National Pension Savings Scheme, into which employees without good employer provision would automatically be enrolled. The proposals, which have now largely been adopted by the UK government, imply eventual increases both in state spending on pensions as a share of national income and in State Pension Age, but accompanied by measures to facilitate later and more flexible retirement.Demographic change, Pensions, Retirement incomes, Social security

Spending Patterns of High-income Households

[Excerpt] Although, less than 6 percent of the Nation’s consumer units (CUs) had annual incomes of more than $90,000 in 1994-95, these households accounted for over 14 percent of total annual spending. High income households spent about$405 billion of the $2.8 trillion total outlays of complete income reporter households. These high-income households, on average, spent more than other households (see table), and they allocated their expenditures differently (see chart). Households with annual incomes of more than$90,000, allocated larger shares to food away from home; housing operations, supplies and furnishings; personal insurance and pensions; cash contributions; entertainment; and apparel and services. Households with lower annual incomes allocated larger shares to food at home, shelter and utilities, transportation, and health care

Social spending and household welfare: Evidence from Azerbaijan

We measure the response of household consumption of different income groups to social spending during the 2002-2012 period using the aggregated Household Budget Survey Data. We find that households respond more strongly to changes in pensions than to changes in allowances and in-kind transfers. The very weak response of households to changes in allowances and in-kind transfers, both of which are transitory income, is consistent with the permanent income hypothesis. The estimates of pension elasticities suggest that the response of the low income group to changes in pensions is the strongest, whereas the response of the middle income group is the weakest. We further find that, in aggregate, households of all income groups do not exhibit habit persistence

Appendix 2 : Taxation in Europe : Towards more competition or more co-ordination ?

Taxation is high in EU countries. Tax-to-GDP ratios stand at around 40% compared with 25% in Japan and the US. This high level of taxation provides the funding of the European social model characterised by a high level of public expenditure and transfers. Apart from governing powers (armed forces, police, justice), the State provides free services to households (education, health); finances public infrastructures, research, culture; pays significant social transfers (family policy, minimum income) and social insurance (pensions, unemployment). Ageing populations imply higher pensions and health spending; technical progress leads to higher education and research spending; rising social exclusion implies higher assistance benefits. People ask for more public infrastructure and higher security spending. Military spending as well as aid to developing countries seem to be required if countries wish to play a major role internationally. All these elements make the rising trend in public spending difficult to resist. Besides, European countries think that public spending should be on a contributory basis. It makes sense to have people on highest incomes or wealth pay more for collective spending, as they benefit most from the way the social system is organised. Taxes must reduce income inequalities. It is hence crucial for European countries to remain entitled to collect tax revenues, according to democratically agreed rules. Section 2 discusses how the European social model is at risk in a global world; it discusses several strategies for European taxation: competition, unification, coordination. Section 3 provides a descriptive analysis of tax structures and trends in Europe. Section 4 deals with income tax coordination. Section 5 addresses social contributions coordination. Section 6 deals with corporate taxation. Section 7 concludes with a strategy for tax co-ordination