Estimating The Impacts of Demographic and Policy Changes On Pension Deficit A Simple Method and Application to China

This article derives a simple method for projecting pension deficit as percent of GDP in future years based on commonly available population forecasting and a few predictable economic and policy variables. Compared with the classic basic equilibrium equation of pension funds, our new formula decomposes the retirees-workers ratio which mixes various kinds of impacts into three more-easily-predictable variables – the elderly dependent ratio, the prevalence of pension coverage, and the employment rate. Our illustrative application to China shows that gradually increasing the current low minimum age of retirement will largely reduce the pension deficit, under various demographic regimes. The pension deficit as % of GDP in the low fertility scenarios (which corresponds with keeping the current rigid fertility control policy unchanged in the longrun)would be 5.6-11.1, 3.8-6.3, and 9.0-13.8 times as high as that in the Medium Fertility & Medium Mortality scenarios in 2040, 2060, and 2080

Pensions with early retirement and without commitment

In this paper it is shown that more generous early retirement provisions as well as lower employment lead to lower steady state pension rates if governments weigh the welfare of the older persons relatively strongly. A relatively stronger weight on the welfare of the young reverses the results. The driving forces behind those findings are governments that cannot commit to pension policies and consequently take into account future governments' policies when maximizing electoral support from the currently young and old constituencies. -- In dem Beitrag wird gezeigt, dass Pensionssysteme mit generöseren Frühverrentungsregelungen sowie niedrigere Beschäftigungsquoten geringere Pensionen zur Folge haben, falls Regierungen die Wohlfahrt der Pensionäre stärker gewichten als die der jüngeren Generation. Gewichtet die jeweilige Regierung in ihrer Entscheidung über die Pensionspolitik die Wohlfahrt der jüngeren Generation stärker als die der älteren Generation, so kehrt sich das Ergebnis ins Gegenteil um. Die Ergebnisse beruhen im Wesentlichen auf der Annahme, dass die Pensionspolitiken heutiger Regierungen für zukünftige Regierungen nicht bindend sind. Im Bestreben um die maximale Zustimmung der heutigen Wählerschaft berücksichtigen Regierungen daher die Folgen der Pensionspolitiken nachfolgender Regierung auf die derzeit noch jüngere Generation.

Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay-as-you-go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer-provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy"s Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.

Projection methods and scenarios for public and private pension information

Public pensions - the primary pillar of old-age income provision - will, in the future, be less generous than they have been in the past, in particular owing to the impact of demographic change. The pension gap is supposed to be plugged by the second and third pillars of pension provision. However, people require reliable planning information if they are to exercise greater individual responsibility. It is therefore absolutely essential that adequate information is made available about the level of pension benefits that will be generated by each pillar of old-age pension provision. This paper outlines a number of different means of presenting the level of future pensions and the assumptions on which such extrapolations are necessarily based. Our work is based on an assumed average rate of inflation of 1.5% and an average rate of real income growth not exceeding 1.5%. This last figure is derived from calculations made in the framework of a macroeconomic simulation model. This model also shows that while the funded pillar of old-age pension provision is not entirely immune to population aging, it is not substantially threatened by a substantial decrease in stock market prices, the so-called "asset meltdown".

Projection methods and scenarios for public and private pension information

Public pensions – the primary pillar of old-age income provision – will, in the future, be less generous than they have been in the past, in particular owing to the impact of demographic change. The pension gap is supposed to be plugged by the second and third pillars of pension provision. However, people require reliable planning information if they are to exercise greater individual responsibility. It is therefore absolutely essential that adequate information is made available about the level of pension benefits that will be generated by each pillar of old-age pension provision. This paper outlines a number of different means of presenting the level of future pensions and the assumptions on which such extrapolations are necessarily based. Our work is based on an assumed average rate of inflation of 1.5% and an average rate of real income growth not exceeding 1.5%. This last figure is derived from calculations made in the framework of a macroeconomic simulation model. This model also shows that while the funded pillar of oldage pension provision is not entirely immune to population aging, it is not substantially threatened by a substantial decrease in stock market prices, the so-called “asset meltdown”.

Demographic Changes and Pension Finances in Vietnam

This paper aims to provide a long-term financial vision for the Vietnamese pension scheme using stochastic modeling for key variables under an actuarial framework. In particular, we project the pension fund balances in order to see whether the scheme will be financially sustainable. The median values of the status-quo projections show that the pension fund will be depleted in about 2052 with a 90-percent confidence interval range of 8 years. The estimated results from our sensitivity tests show that the retirement age, the indexation method for pension benefits, and the contribution rate are all crucial determinants of the pension fund balance in the long term. At the same time, some factors, including coverage rates, administrative costs, the long-term fertility rate, and the rate of return on pension fund assets play less important roles in determining the fund’s balance.aging, stochastic projections, pension finances, Vietnam

Is Social Security Secure with NDC?

The introduction of NDC public pension scheme in few European countries, such as Latvia, Sweden, Italy, and Poland, in the nineties was motivated, among other things, by the need (i) to ensure the long term financial sustainability of the public pension system by linking pension returns to economic growth; (ii) to reduce the existing distortions in the labor market, due to the existing strong incentives to retire early, (iii) to increase the intergenerational equity of the system, jeopardized by the different returns across generations; and (iv) to reduce the systematic political interference with public pension systems under aging through the introduction of a sequence of automatic adjustments in the system that do not require government intervention. After more than ten years from their introduction, these systems have performed reasonably well on these accounts. However, some degree of political involvement with the working of the pension systems has continued (f.e., in Italy), and new concerns have emerged. In particular, the combination of a pension system, which strongly bases the benefit calculation on previous contributions (and on thus labor market status), and the existence in some countries of a dual labor market, with young workers being held on the margin of the regular labor market for many years, create a new, potentially strong challenge to these systems. Our simulations of the future pension benefits for the current generation of young workers with a discontinuous working history in Italy and Sweden suggest that the replacement rates will be low, unless the retirement age is significantly increased. This effect may end up jeopardizing the political sustainability of these NDC systems in the future, unless important labor market reforms are introduced. We discuss the effects on the future generation of retirees in Italy and Sweden of a current labor market reform: the introduction of a unique labor market contract, aimed at reducing the dualism between temporary and permanent workers.notional defined contribution, pay as you go, labor market dualism and pensions

Public Pensions Reform in Romania. How Affect the Public Finance Sustainability?

This paper deals with the problem of the public pension system’s sustainability in Romania and its impact upon the sustainability of the public finance. Thus, the public pension deficit increased in the last three years, caused by the unsustainable increase of pensions during expansionary years and by decrease of number of taxpayers in the economy. Unfortunately, the pressure on public pension system will continue in the next decades due to decline of the total population and of the working age population and to increasing share of the older people. The first part of the paper is an explanation for the factors which affect the public pension system, and it presents this system’s vulnerabilities. The second part is a brief presentation of the effects of the reforms made after December ’89, with reference to the public pension system. The third part outlines the impact of the unitary pension law upon the improvement of the balancing position of the public pension system. The last part makes an analysis for the budget impact of the unitary pension law, outlining the comparison between the basic scenario – keeping the current system and the alternative scenario, which provides a rich package of reforms with reference to this field.public pensions system, private pensions system, finance sustainability, reforms, ageing problem

Forecasting China's Medical Insurance Policy for Urban Employees Using a Microsimulation Model

This paper uses microsimulation techniques to model individual's medical behavior and forecast the effects of different settings of medical insurance policies. The aim of the simulation is to measure the possible change and difference in policies in the process of implementation of the medical insurance policy settings for government policy makers. Based on predicting the medical expenses for urban employees in Zhenjiang, Jiangsu Province of China, the medical insurance policy was simulated over the five-year forecast period 2002 - 2006. The results estimated that the medical expenses of medical insurance participants in Zhenjiang will increase over this period. Retirees were found to be the main group of participants receiving the highest share of medical resource expenditure, with their medical expenses accounting for more than 45% of total medical expenses of all age groups. The proportion of medical expenses paid by the social pool funds for all groups of participants will increase annually. In addition to the base case forecasting the current policy setting, this paper also modeled two other policy settings to investigate what happens to key output variables if the policy settings are changed.Medical Insurance, Policy Research, Microsimulation, Model