Pension reform in the Czech Republic: Not a Lost Case?

In this paper, we combine macro and microeconomic approaches to a pension reform. First, we modify an OLG model and estimate macroeconomic effects of a pension systém switch from a pure PAYG to a mixed system. Second, we employ macroeconomic results in a microeconomic simulation in which we estimate individual welfare gains for various income groups in each cohort affected by the pension reform. We propose an unorthodox sequencing of the pension reform in which the pre-retirement generations would enter the reformed system first. This sequencing maintains the Pareto efficiency condition for all age cohorts, but it gives governments more flexibility in the reform process.pension systems; pay-as-you-go; pension reform; funded pillar

: Who Pays Taxes and Who Gets Benefits in the Czech Republic

In this paper, we summarize our previous research into the distributive effects of the tax and social systems in the Czech Republic. We construct a measure of the total tax burden for ten income deciles and we measure it against social benefits distribution. Our analysis shows that the poorest decile gains significantly from the combined tax and social systems, as its income is lifted by almost a quarter, income of the five richest deciles is cut by approximately 40%. This highly progressive nature of the Czech system is due to the fact that poorest households pay very low direct taxes (including social security contributions) and consume most of social benefits. This combination creates a substantial poverty trap for poorest households. Only regressive parts of the whole system are consumption taxes (excise taxes and to a larger extent value added tax). Our analysis, thus, confirms a high level of redistribution of income and strong disincentives for labor market participation of low-income groups in the Czech Republic.tax policy; social policy; income distribution; tax burden

Reforming Pensions in Europe: Economic Fundamentals and Political Factors

This paper analyzes pension reforms in Europe and their determinants. As pension reforms are intrinsically difficult to define and pinpoint, we introduce an alternative measure of pension reforms by comparing long-term forecasts of pension expenditures for seventeen European countries. The larger the decrease in expected spending on public pensions in 2050 between two base years, the more successful a pension reform the country achieved (after controlling for other factors, such as demography). Our analysis shows that the reform effort varies widely across countries and over time. Indeed, only three countries in the EU managed to reduce their expected spending on pensions in both reference periods. In the second part of the paper, we analyze factors that may facilitate or hamper pension reform – quality of fiscal institutions, public debt, trade unions’ influence, and also demographic factors. Only the measure of trade union power proves to be significant in explaining pension reforms. Other factors, such as quality of fiscal institutions, size of the existing funded pillar, public debt or recent demographic developments, do not seem to play a significant role. However, specific pension system factors – most significantly the lagged change in pension expenditures – are significant and suggest that European governments do reform their pension systems when faced with the threat of escalating pension expenditures. In conclusion, we propose a hypothesis of “bounded” economic rationale of European governments, as they seem to react to expectations of an increase in pension spending, but they seem to be content with the current spending levels. The appendix gives detailed information on pension reforms in the ten Central and Eastern European countries that became EU members in 2004 and 2007 (EU-10).pension system, European Union, pension reform, fiscal institutions

Distributive Impact of Czech Social Security and Tax Systems in Early 2000`s

In this paper, we analyze the Czech social and tax systems and their impact on income distribution. We use regular household surveys, organized and published by the Czech Statistical Office (CSO), for years 1999-2002. This longer time span allows us to identify some trends in the Czech social security system and their impact on well-being of various income groups. We find that while the total cost of the Czech social security system were not escalating in the period of 1999-2002, the illness benefit – already the largest spending program – rose by enormous 72% in these four years. This largesse failed, however, to improve income of the poorest households as the benefit is very inefficient in increasing income of the poorest households. We also find that spending on more focused programs (social supplement and parental allowance) rose the least. Last but not least, we analyzed the impact of tax deductions on the income distribution in the Czech Republic. These deductions represent a massive transfer, comparable to all social benefits combined. Our analysis shows, that the impact of tax deductions on income of the poorest decile fell significantly over the period of 1999-2002.public budgets; social policy; income distribution

Reforming pensions in Europe: economic fundamentals and political factors

This paper analyzes pension reforms in Europe and their determinants. As pension reforms are intrinsically difficult to define and pinpoint, we introduce an alternative measure of pension reforms by comparing long-term forecasts of pension expenditures for seventeen European countries. The larger the decrease in expected spending on public pensions in 2050 between two base years, the more successful a pension reform the country achieved (after controlling for other factors, such as demography). Our analysis shows that the reform effort varies widely across countries and over time. Indeed, only three countries in the EU managed to reduce their expected spending on pensions in both reference periods. In the second part of the paper, we analyze factors that may facilitate or hamper pension reform quality of fiscal institutions, public debt, trade unions' influence, and also demographic factors. Only the measure of trade union power proves to be significant in explaining pension reforms. Other factors, such as quality of fiscal institutions, size of the existing funded pillar, public debt or recent demographic developments, do not seem to play a significant role. However, specific pension system factors most significantly the lagged change in pension expenditures are significant and suggest that European governments do reform their pension systems when faced with the threat of escalating pension expenditures. In conclusion, we propose a hypothesis of bounded economic rationale of European governments, as they seem to react to expectations of an increase in pension spending, but they seem to be content with the current spending levels. The appendix gives detailed information on pension reforms in the ten Central and Eastern European countries that became EU members in 2004 and 2007 (EU-10)

Voting in the European Union: Central Europe's lost voice

Ten Central European countries became members of the European Union in the years 2004 - 2007. They constitute 20% of the EU's total population; and even though their economic output is much lower, it rises dynamically. New members' impact on the EU policies has nevertheless been limited. This is due not only to the arcane voting rules within the EU, but also to the lack of a common agenda among the Central European countries. Our paper illustrates that the new members rarely vote together and that their influence is thus fairly limited. We argue that as the EU seemingly lacks energy to implement further reforms that would stimulate its economy, impetus for change may come from Central European countries. To that end, however, they have to coordinate their voting and become a more coherent voting group than they are now

Reforming pensions in Europe: Economic fundamentals and political factors

This paper analyzes pension reforms in Europe and their determinants. As pension reforms are intrinsically difficult to define and pinpoint, we introduce an alternative measure of pension reforms by comparing long-term forecasts of pension expenditures for seventeen European countries. The larger the decrease in expected spending on public pensions in 2050 between two base years, the more successful a pension reform the country achieved (after controlling for other factors, such as demography). Our analysis shows that the reform effort varies widely across countries and over time. Indeed, only three countries in the EU managed to reduce their expected spending on pensions in both reference periods. In the second part of the paper, we analyze factors that may facilitate or hamper pension reform quality of fiscal institutions, public debt, trade unions' influence, and also demographic factors. Only the measure of trade union power proves to be significant in explaining pension reforms. Other factors, such as quality of fiscal institutions, size of the existing funded pillar, public debt or recent demographic developments, do not seem to play a significant role. However, specific pension system factors most significantly the lagged change in pension expenditures are significant and suggest that European governments do reform their pension systems when faced with the threat of escalating pension expenditures. In conclusion, we propose a hypothesis of bounded economic rationale of European governments, as they seem to react to expectations of an increase in pension spending, but they seem to be content with the current spending levels. The appendix gives detailed information on pension reforms in the ten Central and Eastern European countries that became EU members in 2004 and 2007 (EU-10)

Voting in the European Union - Central Europe's lost voice

Ten Central European countries became members of the European Union in the years 2004 - 2007. They constitute 20% of the EU's total population; and even though their economic output is much lower, it rises dynamically. New members' impact on the EU policies has nevertheless been limited. This is due not only to the arcane voting rules within the EU, but also to the lack of a common agenda among the Central European countries. Our paper illustrates that the new members rarely vote together and that their influence is thus fairly limited. We argue that as the EU seemingly lacks energy to implement further reforms that would stimulate its economy, impetus for change may come from Central European countries. To that end, however, they have to coordinate their voting and become a more coherent voting group than they are now

Does the Enlarged European Union Need a Better Fiscal Pact?

In this paper, we set out to examine an efficient fiscal policy framework for a monetary union. We find that a monetary union can survive with diverging fiscal policies and that the financial markets are efficient enough to separate between “good” and “bad” fiscal policies and punish the latter with higher costs of borrowing. Therefore, there is only limited spill over effect of “bad” fiscal policy within a monetary union if financial markets work efficiently. We argue, consequently, that fiscal rules in a monetary union are still important as they allow to overcome incentive incompatibility of national fiscal rules and as they may guide financial markets in assessing sustainability of national fiscal policies. Finally, we argue for adoption of an institutional rule, Fiscal Sustainability Council for enlarged European Union. The Council would periodically assess fiscal policies and set guidelines for annual deficits. We argue that in order to make the FSC relevant, governments would be obliged to deposit with the Council a substantial amount of bonds that would be regularly rolled over by the Council. By doing so, the Council would connect fiscal policy sustainability principle with financial markets and would guide financial markets evaluation of national fiscal policies.fiscal policy; European Union; sustainability

A Fiscal Rule that Has Teeth: A Suggestion for a “Fiscal Sustainability Council” Underpinned by the Financial Markets

In this paper, we set out to examine an efficient fiscal-policy framework for a monetary union. We illustrate that fiscal policy’s bias toward budget deficit only temporarily ceased at the end of the 20th century as European countries endeavored to qualify for euro-zone membership, which compelled strict limits on budgetary deficits. We then explore which mechanisms might instill a sense of fiscal disciple in governments. We find that most mechanisms suffer from the incentive-incompatible setup whereby governments restrict their own fiscal-policy freedom. We argue that even multilateral fiscal rules, such as the EU’s Stability and Growth Pact, suffer from the same endogeneity flaw. Consequently, we argue that a fiscal rule must incorporate an external authority that would impartially assess fiscal-policy developments. Using U.S. debt and bond-market data at the state level, we show that financial markets represent a good candidate as, vis-à-vis the American states, they do differentiate state debt according to the level of debt. We thus argue for a fiscal institution – what we call the Fiscal Sustainability Council– that would actively bring financial markets into the fiscal-policy process, and we explain the technique whereby this could be effected.fiscal policy, European Union, sustainability