Social security reforms and early retirement

Many reform proposals of the social security systems in various OECD economies suggest to scale down the non-actuarial parts of the pension systems. These reforms have a flavor of increased efficiency at the costs of welfare losses for low-income individuals. Assessing the economic effects, we investigate five different reform proposals by means of a numerical overlapping generations model for the Norwegian economy. The model features an endogenous retirement age and heterogeneous individuals within generations. It turns out that the various reforms, which scale down the public non-actuarial pension system, lead to increases in the retirement age and steady-state welfare gains for all income classes. Received: 7 December 2000/Accepted: 29 January 2002 All correspondence to ?ystein Th?gersen. Financial support from the Research Council of Norway (The Economic Research Program on Taxation) is gratefully acknowledged. We are indebted to Lans Bovenberg, John Ermisch, Erling Steigum and two referees for valuable comments and useful discussion. Responsible editor: John F. Ermisch.     

Weighting and Aggregation in Composite Indicator Construction: a Multiplicative Optimization Approach

Composite indicators (CIs) have increasingly been accepted as a useful tool for benchmarking, performance comparisons, policy analysis and public communication in many different fields. Several recent studies show that as a data aggregation technique in CI construction the weighted product (WP) method has some desirable properties. However, a problem in the application of the WP method is the difficulty and subjectivity in determining the weights for sub-indicators. In this paper, we extend the WP method and propose a multiplicative optimization approach to constructing CIs. This approach requires no prior knowledge of the weights for sub-indicators. Instead, the weights are generated by solving a series of multiplicative data envelopment analysis type models that can be transformed into equivalent linear programs. Additional relevant information on the weights, if available, can be incorporated into the proposed models. We apply the proposed approach to the 2005 data of 27 economies in the Asia and the Pacific region in the United Nations’ Human Development Index study and present the results.     

Effect of aggregation on the estimation of trend in mortality

There are three approaches to analyzing and forecasting age‐specific mortality: (1) analyze age‐specific data directly, (2) analyze each cause‐specific mortality series separately and add the results, (3) analyze cause‐specific mortality series jointly and add the results. We show that if linear models are used for cause‐specific mortality, then the three approaches often give close results even when cause‐specific series are correlated. This result holds for cross‐correlations arising from random misclassification of deaths by cause, and also for certain patterns of systematic misclassification. It need not hold, if one or more causes serve as “leading indicators”; for the remaining causes, or if outside information is incorporated into forecasting either through expert judgment or formal statistical modeling. Under highly nonlinear models or in the presence of modeling error the result may also fail. The results are illustrated with U.S. age‐specific mortality data from 1968–1985. In some cases the aggregate forecasts appear to be the more credible ones.     

Optimal age of retirement and population growth

The purpose of this paper is to study intergenerational optimal resources sharing when the social planer can choose the retirement age in addition to consumptions and investment. We use the extension of the Diamond analysis by Hu [1979] that incorporates endogenous retirement age. We found that the optimal retirement age is an increasing function of the population growth rate if the elasticity of substitution of old agents' labor for young agents' labor is lower than one. In the millian case, when the size of a population does not matter, and when the elasticity of substitution of old agents' labor for young agents' labor is strictly higher than one, the optimal retirement age is a decreasing function of the population growth rate. In the benthamite case, the change in the optimal retirement age is indeterminate. Received: 19 February 1999/Accepted: 27 February 2001 All correspondence to Bertrand Crettez. We would like to thank Jean-Pierre Vidal for very helpful comments on an earlier draft. An anonymous referee provided insightful comments on a previous version of this paper. Responsible editor: Alessandro Cigno.     

The Contribution of R&D Expenditure to Economic Growth in Developing Economies

This paper examines the role of R&D spending on economic growth of developing economies between the periods of 2000 and 2009. The impact of R&D spending on these economies is determined by using dynamic system GMM, pooled mean group and three stage least square-GMM models. Sixty-six countries are studied and further grouped as; upper-middle-income economies and lower middle-income economies. The result reveals a beneficial impact of R&D spending on economic growth in developing countries. The effect of R&D spending on growth is positive for upper middle-income economies while insignificant in lower income economies. R&D spending has different short and long run effects on growth. Using simultaneous equation models to account for simultaneity and endogeneity, R&D spending remains beneficial to growth and the results remain consistent with the dynamic system estimator.

     

Education and income inequality: The role of a social protection system

In this paper we aim to understand the role a welfare state can play in stimulating risky but profitable activities like investment in education, and in reducing income inequality. We analyze how unemployment benefits may affect investment in education when the latter is characterized by uncertain returns. This is done in an overlapping generations model in which endogenous growth is introduced through human capital accumulation. We develop a numerical example of the model in order to reproduce some key differences between the European versus the North American economy; differences that, according to this model, result from the different degree of social protection characterizing both economies. Received: 02 June 1999/Accepted: 22 February 2000     

On social security financial crisis

We indicate that financial crisis in social security programs might be endogenous because social security affects fertility and human capital's decisions and thus, the aggregate growth rate of the economy. These effects lead to an endogenous erosion of the financial basis of the PAYG social security program so that, as a consequence, the PAYG system is not sustainable and it requires continuous increases in the social security tax rate. I received helpful comments in an earlier version of this paper from G.S. Becker, Larry Sjaastad, two anonymous referees and participants at seminars at Pontificia Universidad Catolica de Chile and The University of Chicago. Remaining errors are my own responsibility. Responsible editor: Junsen Zhang.     

The macroeconomics of fertility in small open economies: A test of the Becker-Barro model for The Netherlands and New Zealand

Becker and Barro (1988) formulated a theoretical model which identified a range of macroeconomic variables which can temporarily or permanently affect fertility in small open economies. This article tests the Becker-Barro model with relevant data which covers most of the 20th century for two small open economies, namely The Netherlands and New Zealand. The results show that government subsidies for having children have a strong positive effect on fertility, while the provision of public pensions has a strong negative effect. The degree of intergenerational altruism appears to have been declining. Moreover, there is only weak support for the hypothesis that real interest rates positively influence fertility. Received: 2 March 1998/Accepted: 1 September 1999     

Health, widowhood, and family support in the North and South Pacific: a comparative study

This paper compares the impacts of health and widowhood on the level of support received by elderly women living in small island communities within the Philippines and Fiji. Using a theoretical perspective of ongoing reciprocal exchange as opposed to altruistic support within household economies, this paper reviews the impacts of disability and economic contributions on the level of support an elderly female receives. It is hypothesized that as the health of the widow declines her access to care will also diminish due to an inability to contribute to the household economies of the extended family. This paper extends existing work on health and family support of widowed females in the developing world by performing a cross-national comparative analysis as well as by explicitly testing the assumptions of altruism that are a central assumption of most models of long-term care in underdeveloped nations.     

Estimating the goodman,keyfitz, pullum kinship equations: An alternative procedure∗

As is often the case in demography, Goodman, Keyfitz and Pullum (1974) developed their theory of the interrelationships of fertility, mortality and kinship numbers by means of continuous mathematics [integrals], but resorted to ad hoc finite approximations for calculating results in concrete empirical cases. Their reason: ‘Ordinarily, we cannot evaluate the l(x) and m(x) functions for arbitrary values of x, since the data are usually collected for five‐year age intervals’ [p. 24]. Recent developments in computer software now provide an alternative, two‐step procedure that avoids extensive programming of finite approximation algorithms: 1) using a popular scientific curve‐fitting package, functions are found to represent particular sets of discrete data on fertility and mortality, 2) the resulting functions and parameter estimates are then inserted directly into the kinship equations, and the integrals evaluated numerically using readily available mathematics software. This procedure has potentially wide application in other areas of population mathematics where theory is given by integrals and other continuous expressions, but data are for discrete age groups.     

Ansley J. Coale on Increases in Expectation of Life and Population Growth

The rapid decline in mortality after the end of World War II, in combination with a much slower downward adjustment of fertility, resulted in an extraordinary acceleration of world population growth. In a contribution prepared for the 1959 Vienna conference of the International Union for the Scientific Study of Population, Ansley J. Coale présented a concise and spirited exploration of the influence of mortality and fertility on the levels and patterns of growth and on the distribution of the population by age. Using the stable population model as his tool of exploration, Coale présents a comparative analysis of the implications of movements between stable states, making imaginative illustrative assumptions on changes over time and highlighting the often surprising and counterintuitive results of such calculations. The full text of this article, omitting summaries in English and French, is reproduced below from pp. 36–41 in Union Internationale pour I?étude scientifique de la population, Internationaler Bevölkerungskongress, Wien:Im Selbstverlag, 1959. Ansley Coale was one of the most prominent figures in demography in the second half of the twentieth century. He was born in 1917 and was educated at Princeton University. He spent his entire professional career at Princeton, as a member of the economics faculty and in association with the Office of Population Research, of which he was director from 1959 to 1975. In 1967/68 he was president of the Population Association of America, and from 1977 to 1981 he was president of IUSSP. His many scientific works include Population Growth and Economic Development in Low‐Income Countries (1958), coauthored with Edgar M. Hoover, a book that was highly influential in shaping the international population policy agenda from the 1960s on—lately receiving renewed attention as a predictor of the “demographic dividend” benefiting economies as a result of the transition to low fertility. He was initiator and leader of the Princeton project exploring the causes of the decline in marital fertility in Europe, culminating in the 1986 book, coedited with Susan C. Watkins, The Decline of Fertility in Europe. His most lasting contribution to population studies, however, was in the field of formal demography, as both teacher and scholar. His research in this area is exemplified by the 1972 book The Growth and Structure of Human Populations: A Mathematical Investigation, and in the application of demographic models to the estimation and analysis of population data. Ansley Coale died on 5 November 2002, at the age of 84.     

How powerful is demography? The Serendipity Theorem revisited

Introduced by Samuelson (Int Econ Rev 16(3):531–538, 1975), the Serendipity Theorem states that the competitive economy will converge towards the optimum steady-state provided the optimum fertility rate is imposed. This paper aims at exploring whether the Serendipity Theorem still holds in an economy with risky lifetime. We show that, under general conditions, including a perfect annuity market with actuarially fair return, imposing the optimum fertility rate and the optimum survival rate leads the competitive economy to the optimum steady state. That Extended Serendipity Theorem is also shown to hold in economies where old adults work some fraction of the old age, whatever the retirement age is fixed or chosen by the agents.     

When do couples sign the one-child certificate in urban China?

This paper analyzes a central part of China's one-child policy: when do eligible couples sign the one-child certificate and what are important socioeconomic determinants of this decision? We use proportional hazard models applied to micro-data from the 1985 Chinese Fertility Survey to study this question. Our results for urban residents in Hebei and Shaanxi indicate that a couple's socioeconomic characteristics significantly affect the timing of signing the certificate. In particular, education of the husband and wife, household wealth, and the age at marriage increase the probability of signing the certificate at an earlier time, while living space decreases the probability. Living in extended family structure or a male first child (to test for son preference) apparently have little effect.     

Family size and optimal income taxation

This paper studies the role of family size in the design of optimal income taxation. We consider a second best setting where the government observes the number of children and the income of the parents but not their productivity. With a linear tax schedule the marginal tax rate is shown to decrease with the number of children, while the relationship between the demogrant and family size appears to be ambiguous. With two ability levels, optimal non-linear income tax implies zero marginal tax rates for the higher ability parents; low ability parents have positive marginal tax rates that decrease with family size. Received: 4 September 2000/Accepted: 17 May 2001     

Pensions as a portfolio problem: fixed contribution rates vs. fixed replacement rates reconsidered

Pay-as-you-go (PAYG) pension schemes can contribute to better intergenerational risk-sharing and diversification. However, different variants of PAYG schemes entail different properties in these respects. In a stochastic 2-OLG model we compare PAYG schemes with fixed contribution rates and such with fixed replacement rates. The literature has shown that the former are preferable to the later from an ex ante perspective. We derive the opposite result for the ex post perspective. Here, schemes with fixed replacement rates are unambiguously preferable: they enhance intergenerational risk-sharing, lead to a higher savings and higher utility levels. We further show that, from an ex ante (veil-of-ignorance), perspective both schemes are non-comparable if the effect that fixed-replacement schemes serve as an insurance device for old-age income is properly accounted for. Received: 7 December 2000/Accepted: 17 May 2001     

Extending the Lee-Carter Method to Model the Rotation of Age Patterns of Mortality Decline for Long-Term Projections

In developed countries, mortality decline is decelerating at younger ages and accelerating at old ages, a phenomenon we call “rotation.” We expect that this rotation will also occur in developing countries as they attain high life expectancies. But the rotation is subtle and has proved difficult to handle in mortality models that include all age groups. Without taking it into account, however, long-term mortality projections will produce questionable results. We simplify the problem by focusing on the relative magnitude of death rates at two ages (0 and 15–19) while making assumptions about changes in rates of decline at other ages. We extend the Lee-Carter method to incorporate this subtle rotation in projection. We suggest that the extended Lee-Carter method could provide plausible projections of the age pattern of mortality for populations, including those that currently have very high life expectancies. Detailed examples are given using data from Japan and the United States.     

Social security,social welfare and the aging population

This study examines the effects of pay-as-you-go social security programs in aging economies when the middle-aged both educate their dependent children and subsidize the retirement of the old. Using an overlapping generations framework in which agents are three-period lived but timing of death in the third period is uncertain, we analyze the effects of social security tax schemes, under various demographic assumptions, on capital accumulation, education expenditures, social welfare, and economic growth. We find that in many cases social security crowds out education, and reduces economic growth and social welfare. Received: 29 April 1998/Accepted: 3 March 1999     

Fertility rates and skill distribution in Razin and Sadka’s migration-pension model: A note

Razin and Sadka (1999) show that unskilled immigration is beneficial to all income and all age groups in society, even if immigrants are net beneficiaries of the welfare system. Among other things, this result rests on the assumptions that immigrants have the same reproduction rate as the native population and that the immigrants offspring has the same distribution of skills as the natives offspring. By relaxing these assumptions, we show that the Razin and Sadka result is no longer unambiguous.Helpful comments and suggestions from two anonymous referees are gratefully acknowledged. Responsible editor: Alessandro Cigno.     

International labor migration and social security: Analysis of the transition path

This paper numerically simulates a two-country overlapping-generations model to study international labor migration when the two countries are characterized by different social-security systems. The present analysis extends previous work beyond steady-state considerations. The most striking result is that in all cases considered, dynamically efficient and inefficient economies in autarkic steady-state, migration leads to temporary welfare losses in both countries. In all cases, the transition path is characterized by temporary dynamic inefficiency in one country.All correspondence to Doris Geide-Stevenson. We would like to thank an anonymous referee for very helpful comments. We are responsible for any remaining errors. Responsible editor: Christoph M. Schmidt.     

Assessing the effects of an early retirement program

We investigate induced retirement effects of the Norwegian early retirement program AFP and emphasize effects caused by relocations of some individuals from disability pension and unemployment to AFP. Theoretical considerations predict that AFP unambiguously induces more early retirement. Analyzing Norwegian register data 1994–96 with parametric and non-parametric methods, we demonstrate that i) economic incentives influence the retirement decision, ii) there is a significant net induced retirement effect, iii) by a conservative judgment, at least 50% of the AFP retirees would have stayed in the labor force without the scheme.All correspondence to Espen Bratberg. We are indebted to the referees for detailed remarks, which significantly improved the paper. Financial support from the Norwegian Research Council and the Ministry of Health and Social Affairs is greatly appreciated. We are grateful for valuable comments from Erik Hernæs and Astrid Grasdal, seminar participants at the Norwegian School of Management in Oslo, the Institute for International Economic Studies in Stockholm, and the University of Linz, the 2000 Conference of the European Society for Population Economics in Bonn, and the German-Norwegian Seminar on Social Insurance in Berlin, 2000. Bratberg would also like to thank the Humboldt University for its hospitality during a stay in the winter of 2003. Responsible editor: Christoph M. Schmidt.