Advanced Research Proposal: Report on 1st Year PhD Outputs

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Advanced Research Proposal Report on 1st Year
PhD Outputs

• Elisa Baroni
• a.c. 2005-2006
• NUI Galway
• Supervisor Dr. Cathal O Donoghue

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About me.

• B.A. Philosophy (1996), M.A. International
  Relations (1997), MSc Economics (2003) from LSE.
• Worked in international development before
  joining UK Dept. Work and Pensions in 2004.
• Since 2004, Micro-simulation Modelling of
  Tax/Benefit systems (PSM, BRAHAMS LIAM) and
  labour supply (LSM).
• Currently at IFS, Stockholm. Developing new
  micro-simulation model for Sweden (IFSIM).

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Research Question

• The world Population is growing older
• Will the old grow poorer ?

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PhD Research Objectives

• Theoretical
• To identify economic criteria for evaluating
  pension systems and pension reform, in the
  context of population aging
• Empirical
• To quantify the effects of demography pension
  systems pension reforms on future poverty
  inequality, for aging countries (Ireland, Sweden)
• To develop micro-simulation tool for theory
  validation and policy making

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Aging

• Population Aging lower mortality lower
  fertility higher life expectancy
• By 2050, in EU
• ? proportion of 65 projected to double
• average projected increase in dependency ratios
  (Old / Young, Pensioners / Workers) from 24 to
  49
• average projected increase in retirement years
• average projected increase in pension expenditure
  by 3-5
• Aging implies more pressure for redistribution
  from shrinking active population to growing
  inactive population

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Economic Consequences of Aging

• Higher pension / health care costs ?
• Higher taxes ? Lower Savings ? Lower Private
  Transfers ?
• Lower Output Growth ?
• Higher pensioner poverty ?
• Higher inequality ?

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Pension Systems Pillars

• Pension System
• Public
• Occupational
• Private

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Aims of Pension System

• Pension Systems redistribute resources for
• Insurance / Income Security / Consumption
  Smoothing (all pillars)
• Poverty Reduction (first pillar)
• Inequality Reduction (first pillar)
• ? Aging can undermine the performance of a
  pension system relative to its aims

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Aging and Pensions

• Future will depend on complex interactions
  between Demography Labour Pension System.
• Aging can affect sustainability / efficiency /
  equity of a Pension System
• Pension System can also induce behavioural
  changes e.g. increased retirement age which can
  counterbalance demographic effects
• Economic consequences of Aging and Pension System
  need to be analysed together ? net effects.
• What pension system is better to address
  consequences of aging ?

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Economic Principles of Pension Systems and
Pension Reform

• Efficiency impact of system on aggregate savings
  / labour supply / growth
• Equity impact of system on income distribution,
  e.g. between generations
• Financial Stability impact of system on public
  finances
• Political Sustainability is the system going to
  be supported by future generations ?

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Aging and PAYG

• Balanced DB Public PAYG c (WL)1 (NP)2
• Aging PAYG ..
• affects system balance c up or P down (unless W
  up)
• can harm growth if raising c, discouraging
  savings and work, or raising national debt.
• can increase old age poverty if lowering P
• can redistribute unfairly between generations if
  they have no actuarial link
• can be politically unsustainable

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What Pension Reforms ?

• Parametric Reforms
• Changes to retirement age, replacement ratio,
  contribution rate, indexing, or taxation of
  pensions
• Systemic Reforms
• Changes to system structure or financing of the
  system
• Moving to Funding
• Making benefit more actuarial (DC)

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Systemic Reforms (Theory)

• Making PAYG term actuarial (DC)?
• P1 (1 G)c (W)1
• ? lower effective tax ? less distortion
• ? lower pension costs. But
• more risk on individual
• Moving to Funded system ?
• NP (1R) ? no tax, no distortion, more savings
  growth. But
• cost of pension for transitional generations must
  be paid by new tax.
• annuities prices will be affected by aging

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The Anglo-Saxon Approach to Pension Reform

• 3 Pillars approach to Pension Reform
• 1st Public PAYG to cover only minimum income /
  poverty. Mandatory
• 2nd Occupational Funded to provide income
  replacement and insurance. Mandatory
• 3rd Personal Funded to provide extra insurance.
  Voluntary

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PART IIAging in Ireland

• Currently, Ireland is young lowest proportion of
  65 in EU, at 11.1. But
• Proportion of 65 projected to be 28 by 2056.
• Dependency ratio (L /P) will decrease from 5 down
  to 2 working age people per pensioner by 2050.
• Pension Bill projected to increase from 4.6 to
  over 9 of GNP by 2050

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Pensioners Poverty in Ireland

• Currently, highest poverty risk for Irish
  pensioners (women) in EU ! 48 below poverty line
• State pension (RP or OAP) main source of income
  for pensioners
• Flat benefit, contributory or means tested, ca
  32 of gross average industrial earnings, not
  indexed.
• Occupational Pension Membership low - 50 of
  workers
• Personal Pension Saving lowest 3 of workers
• Average Replacement Rate 50 for couple, 43 for
  single pensioner.
• Given low OAP/RP replacement rate, more
  pensioners need to access supplementary pensions
  to reach target RR, unless public pensions are
  reformed.

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Pension Reforms in Ireland

• Objectives
• Ensuring Adequacy of Pensions
• RR at 50 of pre-retirement income
• COAP / CRP at 34 of average industrial wage
• Increasing supplementary pension Coverage to 70
  by 2013
• Addressing Financial Sustainability

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Recent Reforms

• Pre-Funding
• Ease of access to PRSA
• Indexation rate of Pensions
• PRSI Credits for periods spent in child care,
  unemployment etc.
• ? Future Poverty and Redistributive impact ?

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Simulated Reforms

• Parametric Reforms
• Increasing / Indexing State pensions
• Introducing an earnings related State pension
• Raising Retirement Age
• Tax incentives for supplementary pensions
• Indexing pensions to life expectancy
• Systemic Reforms
• Move to mandatory funded system
• Apply Pension system from a different country
• ? Dynamic Micro-simulation model to quantify
  effects of existing suggested reforms and
  compare

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Intended PhD Structure I

• Part I
• The Challenges of Aging for Pension Systems and
  Pension Reform an Overview v
• The Economics of Pension Systems and Pension
  Reform
• Types of Pension Systems v
• Types of Pension Reforms v
• Theoretical Models OLG v
• Empirical Models Micro-simulation, (LIAM),
  Agent Based Models v
• Part II
• Aging and Poverty in Ireland v
• Simulating The Irish Pension System. v
• The Irish Pension System - Overview
• The LIAM model for Ireland
• Estimations/Validation
• Baseline Study Simulating the long term effects
  of the Irish Pension System Baseline assumptions
  and results using LIAM
• Reform Study Simulating Irish Pension Reforms
  Results under hypothetical reforms / assumptions,
  and comparisons with baseline.

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Intended PhD Structure II

• Part III
• Pension Systems and Incentives behavioural
  effects on retirement v
• Estimating a Retirement Model in LIAM
• Simulating the long term effects of the Irish
  Pension System on Retirement Comparing the Irish
  baseline / reform scenarios using the retirement
  module
• Part IV
• Comparative Pension Systems Analysis using LIAM
  Results from Sweden and Ireland. Separating the
  effect of different institutional, demographic
  and labour market characteristics on poverty
  risks.
• Part V
• Conclusions
• Micro-simulation as a tool for disentangling the
  effects of pension design, demographics,
  behaviours.
• what can we learn from micro-simulation of
  pension systems which we could not foresee from
  economic theory ?

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Original PhD Contributions

• Using LIAM dynamic micro-simulation model to
  produce distributional analysis up to 2050 under
  actual and simulated pension reforms in Ireland.
• Building a new retirement module in LIAM, to
  include behavioral effects ( retirement
  decision) of pension reforms.
• Producing an alternative set of analysis using
  the new retirement model in LIAM, comparing to
  previous outputs.
• Adapting LIAM to Swedish data and producing a
  comparative analysis between the Irish and
  Swedish pension systems.
• Finalizing a paper on the redistributive effects
  of corruption using cross-country data.