Reforming pensions : myths, truths, and policy choices.

This paper discusses the building blocks of pension reform in the light of economic theory, and their application to different types of economy. The opening section sets out the simple economics of pensions. The second section discusses a series of myths which have proved remarkably persistent. Building on this analysis, the latter part of the paper sets out the foundations of effective pensions policy. The third section discusses the prerequisites which any pension reform must respect, i.e. those things which policy advisers can – and should – assert authoritatively. The fourth section turns to the range of choices facing policymakers, drawing on the very different arrangements in different countries. The main conclusions are threefold: 1. The key variable is effective government. 2. From an economic perspective, the difference between Pay-As-You-Go and funding is second order. 3. The range of potential choice over pension design is wide. One size does not fit all.

Economic theory and the welfare state : a survey and interpretation.

'I propose here the view that, when the market fails to achieve an optimal state, society will, to some extent at least, recognize the gap, and nonmarket social institutions will arise attempting to bridge it....' (Kenneth Arrow 1963, p. 947). 'Economic theorists traditionally banish discussions of information to footnotes. Serious consideration of costs of communication, imperfect knowledge ... would, it is believed, complicate without informing.... [T]his comforting myth is false. Some of the most important conclusions of economic theory are not robust to considerations of imperfect information' (Michael Rothschild and Joseph Stiglitz 1976, p. 629). 'That any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg, is enough to make one despair of political humanity' (George Bernard Shaw, The Doctor's Dilemma, 1911).

Income transfers in transition : constraints and progress.

Visiting the main employment office in Warsaw in late 1989, I asked how many people they were currently paying benefits to. The answer (in a city of 1.6 million people) was five. A year later, unemployment in Poland was more than a million, and by December 1993 was three million. There is no need to belabour the resulting strains on a social safety net designed for a very different régime. This paper discusses how the safety nets in the reforming countries, though in many ways well-adapted to the old system, were poorly suited to the needs of a market economy, and what progress has been made in adjusting them. The problems faced by the system of income transfers need to be seen against the backdrop of broader constraints facing policy makers at the start of the reforms. The emphasis on these constraints is not intended to sound gloomy; rather the opposite – it shows how much progress has been made in very difficult circumstances. A former French Prime Minister invited fellow citizens to imagine that France had over a very few years to go through the Political Revolution of 1789, the Industrial Revolution of the nineteenth century and the decolonisation of the 1960’s. That, he pointed out, was precisely what the world community is asking Russia to achieve.

Student loans : towards a new public/private mix.

This paper discusses how to construct student loans to ensure that, for the most part, they count as private spending. Though the specifics relate to the finance of higher education, the issue has much wider ramifications for flexible combinations of public and private activity, for example in financing public transport, paying for infrastructure, and the like. The opening section explains the issue, section 2 justifies the specific loan proposal and section 3 discusses ways of ensuring that the scheme is classified as private.

Income transfers in Russia : problems and some policy directions.

The decision to move to a market economy sets in train two major forces. 1. The fall in output has led to a reduction in personal incomes and created a fiscal crisis. 2. A widening earnings and income distribution is a result of wage and price liberalisation, and is an inherent part of the reform. The change leads to rising unemployment and increased poverty. It also has major administrative implications. Thus, by its very nature, the reform process creates forces which require a major reshaping of the social safety net to address three major issues: poverty relief, cost containment, and strengthening administrative capacity. Of the recommendations, five are paramount. 1. The minimum level of the major benefits should be at or above subsistence and, at least in the short run, should be fully protected against inflation. 2. Cost containment implies that, in the short run, benefits above the minimum should be protected only to the extent that resources permit; and, to the maximum extent compatible with political realities, the right to combine full old age or invalidity pension with more or less full-time work should be withdrawn for individuals below normal retirement age. 3. Administrative capacity should be strengthened. In particular, the administration of cash benefits requires modernisation. Such a process is crucial both to ensure effective benefit delivery, and to containing costs. 4. Social insurance and pension contributions should be shared between worker and employer, with the worker's contribution appearing on his/her payslip. 5. Short-run problems should be addressed in a manner consistent with long-run policy design. In particular, as soon as economically and administratively feasible, the relationship between social insurance benefits and individual contributions should be strengthened.

Higher education funding.

The expansion of higher education throughout the OECD – and beyond – is both necessary and desirable. But it is costly, and faces competing imperatives for public spending. Higher education finance is therefore salient to an extent that is not yet fully appreciated in all countries, and is also immensely sensitive politically. This paper sets out the core lessons for financing higher education deriving from economic theory and puts them alongside lessons from country experience. The UK reforms announced in 2004 are assessed against the backdrop of those two elements. A concluding section briefly maps out unfinished business.

Financing higher education: lessons from the UK debate.

Though directly an assessment of the 2003 White Paper on higher education in England and Wales, this paper offers analysis and strategic conclusions that apply to all advanced countries. After introductory discussion, successive sections weigh up current arrangements (generally unfavourably), assess the White Paper strategy (generally favourably), and discuss the follow-up actions necessary to ensure that the strategy works. A concluding section stresses political leadership, portrays two contrasting futures, and summarises broader lessons for policy design.

The economics of pensions.

This paper sets out the economic analytics of pensions. After introductory discussion, successive sections consider the effects of different pension arrangements on labour markets, on national savings and growth, and on the distribution of burdens and benefits. These areas are controversial and politically highly salient. While we are open about expressing our own views, the main purpose of the paper is to set out the analytical process by which we reach them, to enable readers to form their own conclusions.