Reform and backlash to reform : economic effects of ageing and retirement policy

Using a stochastic general equilibrium model with overlapping generations, this paper studies (i) the effects on both extensive and intensive labor supply responses to changes in fertility rates, and (ii) the potential of a retirement reform to mitigate the effects of fertility changes on labor supply. In order to neutralize the effects on effective labor supply of a fertility decline, a retirement reform, designed to increase labor supply at the extensive margin, is found to simultaneously reduce labor supply at the intensive margin. This backlash to retirement reform requires the statutory retirement age to increase more than proportionally to fertility changes in order to compensate for endogenous responses of the intensity of labor supply. The robustness of this result is checked against alternative model specifications and calibrations relevant to an economic region such as Europe.Labor Policies,Labor Markets,Pensions&Retirement Systems,Economic Theory&Research,Population Policies

Labour supply and retirement policy in an overlapping generations model with stochastic fertility

Using a stochastic general equilibrium model with overlapping generations, this paper studies a policy rule for the retirement age aiming at offsetting the effects on the supply of labour following fertility changes. We find that the retirement age should increase more than proportionally to the direct fall in the labour supply caused by a fall in fertility. The robustness of this result is checked against alternative model specifications and parameter values. The efficacy of the policy rule depends crucially on the link between the preference for leisure and the response of the intensive margin of labour supply to changes in the statutory retirement age.Labour supply; fertility; retirement age; overlapping generations; method of undetermined coefficients

Labor supply and retirement policy in an overlapping generations model with stochastic fertility

Using a stochastic general equilibrium model with overlapping generations, this paper studies a policy rule for the retirement age aiming at offsetting the effects on the supply of labor following fertility changes. The authors find that the retirement age should increase more than proportionally to the direct fall in labor supply caused by a fall in fertility. The robustness of this result is checked against alternative model specifications and parameter values. The efficacy of the policy rule depends crucially on the link between the preference for leisure and the response of the intensive margin of labor supply to changes in the statutory retirement age. The model has subsequently been calibrated for Brazil by Jorgensen (2010), in the context of the Brazil Aging Study.Labor Markets,Labor Policies,Pensions&Retirement Systems,Economic Theory&Research,Population Policies

Distributional Effects of Fiscal Consolidation.

This paper examines the distributional consequences of public debt reduction achieved through spending cuts. Under the assumption that public goods and transfers are relatively more valuable to the poor, our calculations indicate that the elderly poor stand to lose from such policies. Debt reduction produces short-term deficits and long-term surpluses, and when future surpluses are recycled into higher provision of public goods and transfers, future generations of poor could gain. If future surpluses are recycled through lower labour taxes, working households in the future would be positively affected. We conclude that debt reduction could have positive or negative impacts on vertical equity, yet inter- rather than intra-generational equity is likely to pose the greatest obstacle to fiscal consolidation. Based on majority voting by self-interested households, debt reduction would never occur. Yet, in a formal social welfare analysis, some debt reduction programmes may be deemed beneficial with social discount factors as high as two percent. When we then consider alternative time profiles for debt reduction, we conclude that slower is better.

Fiscal Sustainability and Generational Burden Sharing in Denmark

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy in Denmark. A strategy of tax smoothing is found to provide a fairly even intergenerational distribution of the financial burden associated with population ageing. While tax smoothing causes a relatively sharp increase in public debt along the transition path, a strategy of debt smoothing is shown to pass a larger part of the financial burden onto current generations but without changing the intergenerational distribution profile in any dramatic way. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.

Uncertain demographics, longevity adjustment of the retirement age, and intergenerational risk sharing

Under existing welfare arrangements, an increase in life expectancy may pose a serious threat to fiscal sustainability, and it may have dramatic effects on the intergenerational distribution of welfare. This paper finds that such effects may be countered through a policy which links the retirement age to changes in life expectancy. Fiscal Policy, Longevity Adjustment, Ageing, Pensions,Welfare Reform

problems, policies and prospects

Over the last 25 years the Danish economy has had difficulties in growing as fast as other EU countries and the United States. While the average growth difference is small, it signals that if this trend persists into the next century, Denmark will not be able to maintain its high position in the world income hierarchy. Moreover, during these years, the number of individuals living on transfer incomes have increased dramatically. Although we interpret both tendencies as signals of structural weaknesses, we are also aware that these developments may reflect that other goals in economic policy have been pursued, such as protecting the environment and/or achieving certain redistributive objectives. This paper analyzes this and other broad policy issues of importance for Denmark

Lithuanian pension system: Alternatives and proposals for the future. A summary report by The Phare Study Group

The study identifies three groups of problems in the Lithuanian pension environment: fiscal problems, poverty of retired people, and problems related to working and saving incentives. The future of the current pension system is suspect, as the population share of the elderly is increasing and fertility is on a declining trend. The study analyses different policy measures, using e.g. a dynamic general equilibrium model. The research group also proposes a pension policy package, consisting of six points, that will alleviate the poverty problems, result in an efficient pension system, and can be implemented so that the welfare losses to some cohorts, which cannot be avoided during the transition, will be small

Northern and Eastern enlargement of EMU: do structural reforms matter?

This paper studies the incentives to join or enlarge a monetary union under alternative assumptions about the extent of market reform within the union and in candidate countries. Lack of labour mobility, wage/price flexibility or fiscal reform brings costs for both new entrants and in the existing union. Countries will only want to join a union where there has been sufficient reform, and where markets are more flexible than their own. But existing members will want the same properties of their new partners as well. Fiscal restrictions, or a lack of fiscal flexibility, will exaggerate this incentive mismatch and may delay the necessary reforms