Friday, June 6, 2014

New papers from the Social Science Research Network


"The Macroeconomics of PAYG Pension Schemes in an Aging Society"

LIONEL ARTIGE, University of Liege - HEC Management School
LAURENT CAVENAILE, New York University (NYU) - Department of Economics
PIERRE PESTIEAU, University of Liege - Research Center on Public and Population Economics, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute), Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

This paper analyzes and compares the macroeconomic performance of defined-benefit and defined-contribution pay-as-you-go pension systems when population ages. When the fertility rate decreases or longevity rises, it is shown that a shift from defined benefit (defined total benefit or defined annuities) to defined contribution always results in higher per-capita income and life-cycle welfare at the steady state. All results are derived with general production and utility functions.

"State Fiscal Constitutions and the Law and Politics of Public Pensions"
University of Illinois Law Review, Forthcoming
Minnesota Legal Studies Research Paper No. 14-24

AMY MONAHAN, University of Minnesota - Twin Cities - School of Law

Pension plans for state and local employees are, as a whole, significantly underfunded. This underfunding creates intense fiscal pressure on governments and often either crowds out other desired governmental spending or results in employees and retirees losing earned benefits. Political theorists often explain that underfunded public pension plans are all but inevitable given the political realities that affect funding decisions. Politicians who desire to be reelected should rationally prefer to spend money on current constituents, rather than commit scarce funds to a pension plan to pay benefits due to workers decades in the future. These dynamics are exacerbated by existing state fiscal constitutions that require balanced budgets and often restrict the ability to raise taxes. Paying a pension plan less than the amount due provides an easy way to free up money in the state budget by creating a form of debt that is not reflected on the state’s balance sheet. This article presents original analysis of the effect that state fiscal constitutions – even those that contain explicit requirements to fund public pension plans – impact public pension funding dynamics. It finds that even where explicit constitutional funding requirements are in place, plans often continue to be underfunded both because of political and financial pressures, and also because of the distinct lack of an enforcement mechanism. The article concludes by suggesting that these weakness in pension funding requirements can be addressed through the creation of clear and objective funding standards and, most importantly, through the creation of enforcement mechanisms that can, where appropriate, override legislative decisions to underfund public pension plans.

"'Social Insurance,' Risk Spreading, and Redistribution"
Daniel Schwarcz and Peter Siegelman, eds., Research Handbook in the Law and Economics of Insurance (Edward Elgar, Forthcoming)

JAMES KWAK, University of Connecticut - School of Law

Social Security, Medicare, unemployment insurance, and a poorly defined group of similar programs are often called “social insurance.” Social insurance is most often thought of as (a) insurance schemes in which workers make payroll tax contributions and receive benefits following certain insured events or (b) government responses to failures in private insurance markets. Both of these conceptualizations, however, fail to accurately describe some of the programs that are generally considered as social insurance. In this paper, I show that these programs have the following property: in the short term, they are clearly redistributive because we know the relevant outcomes and therefore who will make contributions and who will receive benefits; but in the long term (over one’s lifetime), they spread risk because we do not know what outcomes will occur and therefore who will benefit from the insurance they provide. I propose a new conceptualization of social insurance as government interventions in insurance markets that are redistributive in the short term but that, seen from a lifetime perspective, most people would choose to participate in because of their insurance value. At the margins, it is difficult to define the limits of social insurance. At one extreme, government regulation of automobile liability insurance and individual health insurance imposes risk spreading and redistribution that would not occur in a private market; at the other, public assistance programs such as Medicaid have insurance value for people who do not know what income category they will fall in. The definition of social insurance will always be politically contested because there is no clearly correct timeframe to use when evaluating these programs; proponents can frame social insurance as long-term insurance that benefits most participants, while opponents can frame it as naked redistribution from “makers” to “takers,” without either being obviously wrong.

"A Value-Based Approach to the Redesign of US State Pension Plans"

ZINA LEKNIUTE, Tilburg University
ROEL M. W. J. BEETSMA, University of Amsterdam - Research Institute in Economics & Econometrics (RESAM), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute), Tinbergen Institute - Tinbergen Institute Amsterdam (TIA), Netspar
EDUARD H.M. PONDS, Algemene Pensioen Groep (APG), Tilburg University - Department of Economics, Netspar, Tilburg University - Center for Economic Research (CentER)

This paper explores the financial sustainability of a typical U.S. state defined benefit pension fund under the continuation of current policies and under alternative policies, such as changes in contribution, indexation and investment allocation policies. We explore the "classic" asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigate the value-based ALM results, which provide a market-based evaluation of the net benefit changes to the various stakeholders of changes in the fund's policies. All cohorts of participants derive a substantial net benefit from the current pension contract, implying that tax payers have to make substantial contributions. The aforementioned adjustment measures can be instrumental in alleviating the burden on the tax payer, although this will happen at the cost of a reduction in the value of the contract to the fund participants.

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