Risk Sharing and Efficiency Implications of Progressive Pension Arrangements

The present paper aims to quantify the welfare effects of progressive pension arrangements in Germany. Starting from a purely contribution-related benefit system, we introduce basic allowances for contributions and a flat benefit fraction. Since our overlapping-generations model takes into account variable labor supply, borrowing constraints as well as stochastic income risk, we can compare the labor supply, the liquidity, and the insurance effects of the policy reform. Our simulations indicate that for a realistic parameter combination an increase in pension progressivity would yield an aggregate efficiency gain of more than 2 percent of resources. However, such a reform would not be implemented because it would not find political support of the currently living generations.pension reform, idiosyncratic labor income uncertainty

Private Retirement Savings in Germany: The Structure of Tax Incentives and Annuitization

The present paper studies the growth, welfare and efficiency consequences of the recent introduction of tax-favored retirement accounts in Germany in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of specific savings motives, the mandatory annuitization of benefits and the impact of special provisions for low-income households. The simulations indicate that the reform improves overall economic efficiency by about 0.6 percent of aggregate resources, but welfare decreases significantly for future generations. Finally, we show that special provisions could be very effective in raising the participation of low-income households despite their low budgetary cost.individual retirement accounts, annuities, stochastic general equilibrium

Private Retirement Savings in Germany: The Structure of Tax Incentives and Annuitization

The present paper studies the growth, welfare and efficiency consequences of the recent introduction of tax-favored retirement accounts in Germany in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of specific savings motives, the mandatory annuitization of benefits and the impact of special provisions for low-income households. The simulations indicate that the reform improves overall economic efficiency by about 0.6 percent of aggregate resources, but welfare decreases significantly for future generations. Finally, we show that special provisions could be very effective in raising the participation of low-income households despite their low budgetary cost.Individual retirement accounts, annuities, stochastic general equilibrium

Social Security with Rational and Hyperbolic Consumers

The present paper studies the role of social security in an economy populated by overlapping generations of individuals that have time-consistent or time-inconsistent preferences, face mortality and individual income risk, borrowing constraints as well as progressive income taxes. Our simulations start from an artificial equilibrium where social security is completely neutral. Next we introduce successively alternative deviations from neutrality in order to isolate the various economic effects of social security. The latter are mainly the insurance provision against mortality and income risk, the negative liquidity effects for young households and the provision of a commitment technology for present-biased hyperbolic consumers. Our simulations indicate that the positive effects of social security dominate the negative ones for a wide range of parameter combinations. For our central parametrization social security induces an overall welfare gain which amounts to roughly 1.5 percent of aggregate resources in the hyperbolic model and a welfare loss of about 0.5 percent of resources in the model with rational consumers.social security, stochastic general equilibrium, hyperbolic consumers

Tax-Favored Retirement Accounts: Are they Efficient in Increasing Savings and Growth?

The present paper aims to quantify the macroeconomic and welfare effects of taxfavored retirement accounts. Starting from an equilibrium without saving incentives, we introduce such accounts and compute the new transition path and the resulting long-run equilibrium. Since our overlapping-generations model comprises a detailed progressive tax system, borrowing constraints as well as stochastic income risk, we can compare macroeconomic and liquidity effects, tax distortions and the insurance properties of the policy reform. Our simulations indicate that tax-favored retirement accounts as implemented in many OECD countries will have a significant impact on capital accumulation and wage growth in the long run, but only yield insignificant aggregate efficiency changes. While elderly generations are typically hurt by such a reform, young and future generations benefit. Finally, with respect to the intragenerational redistribution, a subsidy system that includes direct bonus payments might be preferred to a system with pure tax deductions.Savings incentives, stochastic general equilibrium model