CANDIDE et la monnaie

In this paper we deal with the financial sector of CANDIDE 1.1. We are concerned with the determination of the short-term interest rate, the term structure equations, and the channels through which monetary policy influences the real sector.The short-term rate is determined by a straightforward application of Keynesian liquidity preference theory. A serious problem arises from the directly estimated reduced form equation, which implies that the demand for high powered money, but not the demand for actual deposits, is a stable function of income and interest rates. The structural equations imply the opposite.In the term structure equations, allowance is made for the smaller variance of the long-term rates, but insufficient explanation is given for their sharper upward trend. This leads to an overstatement of the significance of the U.S. long-term rate that must perform the explanatory role. Moreover a strong structural hierarchy, by which the long Canada rate wags the industrial rate, is imposed without prior testing.In CANDIDE two channels of monetary influence are recognized: the costs of capital and the availability of credit. They affect the business fixed investment and housing sectors. The potential of the personal consumption sector is not recognized, the wealth and real balance effects are bypassed, the credit availability proxy is incorrect, the interest rate used in the real sector is nominal rather than real, and the specification of the housing sector is dubious

The Impact of Pensions on State Borrowing Costs

Municipal bond prices are tumbling and rates rising just as public borrowers face pressure to refinance deals cut during the financial crisis. At the same time, the funded status of public pension plans has declined, and states and localities will have to come up with more money to meet future benefit payments. In the private sector, numerous studies have shown that pension underfunding affects corporate bond ratings. And Moody’s just announced that it would combine unfunded pension liabilities with outstanding bonds when evaluating a state’s leverage position. These developments raise the question of how future pension commitments affect today’s borrowing costs in the public sector. The brief proceeds as follows. The first section describes the municipal bond market. The second section describes the factors that traditionally have been considered in the bond rating process. The third section summarizes what other researchers have found regarding the relationship between pension commitments and borrowing costs in the private and public sectors. The fourth section presents a model for the period 2005-2009 that relates borrowing costs to factors generally considered by the rating agencies, such as the state’s management, finances, economy, and debt structure. Pensions are a component of the debt structure, and the extent to which states make their Annual Required Contribution (ARC) has a statistically significant – albeit modest – impact on the cost of debt. A side finding is that the bond’s rating explains relatively little about the variation in interest cost, and the effect of pensions remains significant even including the bond’s rating in the equation. The final section concludes that while pension underfunding had only a small effect on borrowing costs in the 2005-2009 period when pension expenses were only 3 to 4 percent of state budgets, its impact could become more significant as the cost of pensions increases.

Simulations d’un modèle basé sur l’hypothèse du cycle de vie

This study was undertaken in order to provide better insight into the dynamics of the life-cycle model and to develop a set of quantitative relationships that model the behaviour of macroeconomic aggregates. To begin, a microeconomic model was constructed which could, with a certain accuracy, reproduce behaviour patterns based on the life-cycle hypothesis and, with the aid of observed data on the Canadian population structure, generate a number of macroeconomic variables implied by this behaviour. The dynamics of this model were then examined in a number of simulations in which the effects of variations in population structure, as well as developments in incomes and the interest rate were analyzed. In a third step, we attempted to estimate certain standard consumption functions using the aggregate data generated by the model. While the estimates we obtained met current econometric criteria, these functions, especially where the interest rate was concerned, did not adequately reproduce the model used to generate the data. Finally we tested other formulations which seemed likely to yield a more acceptable representation of the basic model. This exercise, however, proved disappointing.In conclusion, it was ascertained that the study will have to be further refined in order to integrate into the macroeconomic formulations certain adjustments that would take into account demographic variations as well as the intertemporal substitution effect

Employers' (Lack of) Response to the Retirement Income Challenge

Employers have long had a significant impact on workers’ retirement prospects. Aside from Social Security, employer retirement income plans are the most important source of income for the great majority of retirees. How long workers can stay employed also largely depends on employer hiring and retention and retirement decisions. Both of these functions – retirement income support and the separation process – are now in flux given scheduled declines in Social Security replacement rates, the shift from traditional defined benefit pensions to 401(k)-type defined contribution plans, and the decline in career employment relationships. To assess the employers’ response to changes in retirement income support and the work-separation process, the Center for Retirement Research at Boston College conducted a nationally representative survey of 400 employers. The survey was conducted in 2006 and focused on the employers’ response to the prospects of employees in their 50s. As reported in previous Issue in Briefs, the survey found that employers expect: 1) half these employees will lack the resources needed to retire at the organization’s traditional retirement age; 2) one out of four will respond by wanting to stay on the job at least two years past that traditional retirement age; but 3) the employers are lukewarm about creating opportunities for even half of these employees to work longer. Note that the survey was conducted well before the financial crisis; the retirement preparedness of workers has deteriorated since the survey – making potential employer responses all the more important...

The Impact of Public Pensions on State and Local Budgets

State and local pensions have been headline news since the financial collapse reduced the value of their assets, leaving a substantial unfunded liability. The magnitude of that liability depends on the interest rate used to discount future benefit promises but, regardless of the assumptions, states and localities are going to have to come up with more money. This brief looks at the size of the additional funding relative to state budgets. The brief proceeds as follows. The first section provides an overview of state and local plans and in­troduces our sample of six states: California, Florida, Georgia, Illinois, Massachusetts, and New Jersey. The second section presents data on pension expendi­tures relative to budget totals for states and localities in the aggregate and for our sample of plans. The third section develops baseline budgets for the period 2010-2043 for all states and localities and for the six individual states. It then projects annual required pension contributions beginning in 2014 under three scenarios: 1) amortizing the unfunded liability valued at an 8-percent discount rate over the next 30 years; 2) amortizing the unfunded liability valued at 5 per­cent over the next 30 years; and 3) continuing to pay contributions at current levels until the trust fund is exhausted and then paying benefits on a pay-as-you-go basis. The final section concludes that whereas public plans are substantially underfunded, in the aggregate they currently account for only 3.8 percent of state and local spending. Assuming 30-year amortization beginning in 2014, this share would rise to only 5.0 percent and, even assuming a 5-percent discount rate, to only 9.1 percent. Aggregate data, however, hide substantial variation. States that have seriously underfunded plans and/or generous benefits, such as California, Illinois, and New Jersey, would see contributions rise to about 8 percent of budgets with an 8-percent discount rate and 12.5 percent with a 5-percent discount rate.State and Local Pensions

Simulations d’un modèle basé sur l’hypothèse du cycle de vie

This study was undertaken in order to provide better insight into the dynamics of the life-cycle model and to develop a set of quantitative relationships that model the behaviour of macroeconomic aggregates. To begin, a microeconomic model was constructed which could, with a certain accuracy, reproduce behaviour patterns based on the life-cycle hypothesis and, with the aid of observed data on the Canadian population structure, generate a number of macroeconomic variables implied by this behaviour. The dynamics of this model were then examined in a number of simulations in which the effects of variations in population structure, as well as developments in incomes and the interest rate were analyzed. In a third step, we attempted to estimate certain standard consumption functions using the aggregate data generated by the model. While the estimates we obtained met current econometric criteria, these functions, especially where the interest rate was concerned, did not adequately reproduce the model used to generate the data. Finally we tested other formulations which seemed likely to yield a more acceptable representation of the basic model. This exercise, however, proved disappointing.

A Role for Defined Contribution Plans in the Public Sector

In the wake of the financial crisis, policymakers have been talking about shifting from defined benefit plans to defined contribution plans in the public sector. Three states – Georgia, Michigan, and Utah – have taken action, joining the 10 states that had introduced some form of defined contribution plans before 2008. Interestingly, these new plans are “hybrids” that combine elements of both defined benefit plans and defined contribution plans. Such an approach spreads the risks associated with the provision of retirement income between the employer and the employee. This brief provides an update on defined contribution initiatives in the public sector and then discusses whether the hybrids that have been introduced are the best way to combine the two plan types. The brief proceeds as follows. The first section discusses the issues involved with moving from a defined benefit plan to a defined contribution arrangement. The second section recaps the role that defined contribution plans played in the public sector before the financial crisis. The third section describes the new hybrid plans recently adopted in Georgia, Michigan, and Utah. And the fourth section suggests that a better type of hybrid might be one where defined contribution plans are “stacked” on the state’s defined benefit plan rather than placed alongside of it. The fifth section concludes that defined contribution plans have a role in the public sector, but that role is supplementing, not replacing, defined benefit plans.

How Prepared Are State and Local Workers for Retirement

A widespread perception is that state-local government workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income. The perception is consistent with multiplying the 2-percent benefit factor in most plan formulae by a 35- to 40- year career and adding a Social Security benefit. But this calculation assumes that individuals spend enough of their career in the public sector to produce such a retirement outcome. This brief summarizes the results of a paper that uses Health and Retirement Study (HRS) and actuarial reports published by state and local pension systems to test the hypothesis that state-local workers have more than enough money for retirement.