The Hayek Pension: An efficient minimum pension to complement the welfare state

A means tested minimum income for old age creates an incentive for some not to save for old age and instead to free ride. Recent literature is undecided to what extent this inefficient savings distortion should be addressed by a compulsory pension system because resulting labour-leisure distortions could be even worse. In a simple optimal taxation framework we show that it is Pareto improving to fully eliminate the savings distortion by means of a compulsory pension termed “Hayek pension” that decreases with after-tax lifetime earnings, with zero pension benefits for middle and high incomes. A combination of the Hayek pension and the contribution dependent Bismarck pension is found to be superior to the tax financed flat benefit Beverage pension.

Estimating the size of the European stimulus packages for 2009: An Update. Bruegel Policy Contribution 2009/02, February 20, 2009

[Introduction]. In December 2008, the European Council agreed on an EU‐wide economic stimulus of “around € 200 billion”. However, this agreement is not very specific in two important respects. First, it is unclear which country is to contribute how much to the roughly €170 billion part of the fiscal stimulus that is to be effected by member states, with the remaining €30 billion to be contributed at the EU level. Second, there is no clear timeline detailing which part of the stimulus is to be delivered by when. However, both the geography and the timing of the European stimulus are important dimensions when trying to assess the likely economic impact of the pact and the progress towards it implementation. In order to contribute to the debate on the geography and timing of the stimulus, we presented a first estimate of the size of fiscal stimuli that had recently been proposed by member states (and had, in some cases, already been adopted) just in time for the European Council. The present update of that earlier paper simply presents the latest breakdown of the fiscal stimuli in member states using thesame methodology as before. In addition, an heroic attempt is made to compare the total European package for 2009 to the stimulus packages set to be implemented in theUS and China. To keep the complexity of the EU side of the exercise manageable, we only take into account the 13 largest economies in the EU that make up more than 90 percent of the EU’s GDP, plus the planned boost at the Community level. Despite this simplification, the task of estimating the size of the different programmes remains challenging, not least because of the great variety of different instruments used and the rapid evolution of national debates

Mixing Bismarck and Child Pension Systems:An Optimum Taxation Approach

The labor-leisure distortion of a pay-as-you-go pension system can be reduced through a stronger tax-benefit link or Bismarck pension system. Distortions of the fertility decision can be reduced through the introduction of a stronger child-benefit or child pension system.Within our optimal taxation framework, we find a Corlett-Hague result regarding the optimal mix of the two: if and only if children are more complementary to leisure should the taxbenefit link be given a positive weight at the expense of the child-benefit link. The model also allows us to examine the infertility insurance argument that may justify redistribution from families with children to those without implied by most pension systems. We find that the opposite redistribution, from the childless to those with children, would be efficient if individuals have low risk aversion. Redistribution in favor of the infertile would only be justified when risk aversion is high.pay-as-you-go pension, fertility, externality, Bismarck pension, optimal taxation

How Much Fiscal Equalisation?

We treat fiscal equalisation as an insurance device against regional tax revenue variance. This insurance comes at the price of a moral hazard: regional government will spend too little effort on the development of the local tax base. In a simple bargaining model with two identical regions we show that less than total fiscal equalisation combined with lump sum transfers will be optimal. Taking a step back to the constitutional bargaining behind some veil of ignorance which determines the fallback position for later negotiations, we show that writing total fiscal equalisation into the constitution will be optimal.Fiscal equalisation, constitutional bargaining, moral hazard

The Hayek Pension: An efficient minimum pension to complement the welfare state

A means tested minimum income for old age creates an incentive for some not to save for old age and instead to free ride. Recent literature is undecided to what extent this inefficient savings distortion should be addressed by a compulsory pension system because resulting labour-leisure distortions could be even worse. In a simple optimal taxation framework we show that it is Pareto improving to fully eliminate the savings distortion by means of a compulsory pension termed Hayek pension that decreases with after-tax lifetime earnings, with zero pension benefits for middle and high incomes. A combination of the Hayek pension and the contribution dependent Bismarck pension is found to be superior to the tax financed flat benefit Beverage pension

To what Extent are Public Pensions Pareto-improving? On the Interaction of Means Tested Basic Income and Public Pensions

If there is a means tested basic income for old age, households will tend to reduce precautionary savings to an inefficiently low level. This might serve as a justification for a public pension system. In a representative agent framework, indeed, the introduction of a compulsory pension s ystem is shown to be Pareto improving. This analysis is extended to two income types where compulsory savings are found to be Pareto improving only up to a point. Increases in contribution rates beyond that point simply result in increasingly regressive (implicit) taxation, potentially eliminating all redistribution via the means tested basic income. Using these results in a pay-as-you-go framework, we show that an unfunded pensions system (with intragenerational fairness) plays a role similar to compulsor y savings in preventing the savings moral hazard and could have the same adverse effects on redistribution if it is too large. If the population is aging, however, an unfunded system with a constant contribution rate is found to become less effective at pr eventing the savings moral hazard. In this case, the introduction of a funded system of the right size is needed to restore Pareto efficiency.Public pensions, compulsory savings, means tested basic income

Eurobonds: The blue bond concept and its implications

The Blue Bond proposal, published in May 2010 (Bruegel Policy Brief 2010/03) suggests that sovereign debt in euro-area countries be split into two parts. The first part, the senior Blue tranche of up to 60 percent of GDP, would be pooled among participating countries and jointly and severally guaranteed. The second part, the junior Red tranche, would keep debt in excess of 60 percent of GDP as a purely national responsibility. This paper revisits the proposal, discusses its implications and addresses some of the comments and criticisms received in response to the proposal. This paper was prepared for the European Parliament's Economic and Monetary Affairs Committee, session of 21 March 2011 on the interaction between bank and sovereign debt resolution. Copyright remains with the European Parliament at all times

EU stimulus packages. Estimating the size of the European stimulus packages for 2009: an update

David Saha and Jakob von Weizsäcker present the latest breakdown of the fiscal stimuli in the 13 largest EU economies and compare the total European package for 2009 to the US stimulus package. The authors estimate the size of the European stimulus packages to increase to 0.99% of GDP following increases in the stimulus packages in the Netherlands, the UK and Germany . The US stimulus package is estimated at about 1.7 percent of GDP, substantially above the EU average but only marginally above the largest national stimulus package in the EU

To what Extent are Public Pensions Pareto-improving? On the Interaction of Means Tested Basic Income and Public Pensions

If there is a means tested basic income for old age, households will tend to reduce precautionary savings to an inefficiently low level. This might serve as a justification for a public pension system. In a representative agent framework, indeed, the introduction of a compulsory pension s ystem is shown to be Pareto improving. This analysis is extended to two income types where compulsory savings are found to be Pareto improving only up to a point. Increases in contribution rates beyond that point simply result in increasingly regressive (implicit) taxation, potentially eliminating all redistribution via the means tested basic income. Using these results in a pay-as-you-go framework, we show that an unfunded pensions system (with intragenerational fairness) plays a role similar to compulsor y savings in preventing the savings moral hazard and could have the same adverse effects on redistribution if it is too large. If the population is aging, however, an unfunded system with a constant contribution rate is found to become less effective at pr eventing the savings moral hazard. In this case, the introduction of a funded system of the right size is needed to restore Pareto efficiency

Mixing Bismarck and child pension systems: an optimum taxation approach

The labor-leisure distortion of a pay-as-you-go pension system can be reduced through a stronger tax-benefit link or Bismarck pension system. Distortions of the fertility decision can be reduced through the introduction of a stronger child-benefit or child pension system. Within our optimal taxation framework, we find a Corlett-Hague result regarding the optimal mix of the two: if and only if children are more complementary to leisure should the taxbenefit link be given a positive weight at the expense of the child-benefit link. The model also allows us to examine the infertility insurance argument that may justify redistribution from families with children to those without implied by most pension systems. We find that the opposite redistribution, from the childless to those with children, would be efficient if individuals have low risk aversion. Redistribution in favor of the infertile would only be justified when risk aversion is high