macroeconomic modeling of the pension reforms
DESCRIPTION
Slides from an internal seminar @ National Bank of PolandTRANSCRIPT
Modeling the pension reforms
Macroeconomic modeling of the pension reforms1
Work in progressThe views expressed herein are those of the authors and not necessarily those of Narodowy Bank Polski
Krzysztof Makarski 12 Joanna Tyrowicz234 Jan Hagemejer23
with the assistance of Agnieszka Borowska and Karolina Goraus
1Warsaw School of Economics2Faculty of Economics, University of Warsaw3Economic Institute, National Bank of Poland
4Rimini Center for Economic Analyses
Narodowy Bank Polski, December, 20131 / 55
Modeling the pension reforms
Motivation
The big(ger) picture
A (too) broad scienti�c project at the University of Warsaw
OLG modeling of the pension system reform in Poland
(Our intended) Contributions:
1 �scal closures have welfare e�ects (Pareto e�cient reform?)2 labor market e�ects when intensive and extensive margin is combined
with indivisibility of labor3 political stability of pension reforms
We have (almost) completed (1), still work on (2) and (3)
Today: the-best-of two papers written in stage (1)
1 Welfare e�ects of various �scal closures for 1999 reform2 Unprivatizing the pension system: welfare and macroeconomic e�ects of
2011 and 2013 reforms
2 / 55
Modeling the pension reforms
Motivation
The big(ger) picture
A (too) broad scienti�c project at the University of Warsaw
OLG modeling of the pension system reform in Poland
(Our intended) Contributions:
1 �scal closures have welfare e�ects (Pareto e�cient reform?)2 labor market e�ects when intensive and extensive margin is combined
with indivisibility of labor3 political stability of pension reforms
We have (almost) completed (1), still work on (2) and (3)
Today: the-best-of two papers written in stage (1)
1 Welfare e�ects of various �scal closures for 1999 reform2 Unprivatizing the pension system: welfare and macroeconomic e�ects of
2011 and 2013 reforms
2 / 55
Modeling the pension reforms
Motivation
The big(ger) picture
A (too) broad scienti�c project at the University of Warsaw
OLG modeling of the pension system reform in Poland
(Our intended) Contributions:
1 �scal closures have welfare e�ects (Pareto e�cient reform?)2 labor market e�ects when intensive and extensive margin is combined
with indivisibility of labor3 political stability of pension reforms
We have (almost) completed (1), still work on (2) and (3)
Today: the-best-of two papers written in stage (1)
1 Welfare e�ects of various �scal closures for 1999 reform2 Unprivatizing the pension system: welfare and macroeconomic e�ects of
2011 and 2013 reforms
2 / 55
Modeling the pension reforms
Motivation
The big(ger) picture
A (too) broad scienti�c project at the University of Warsaw
OLG modeling of the pension system reform in Poland
(Our intended) Contributions:
1 �scal closures have welfare e�ects (Pareto e�cient reform?)2 labor market e�ects when intensive and extensive margin is combined
with indivisibility of labor3 political stability of pension reforms
We have (almost) completed (1), still work on (2) and (3)
Today: the-best-of two papers written in stage (1)
1 Welfare e�ects of various �scal closures for 1999 reform2 Unprivatizing the pension system: welfare and macroeconomic e�ects of
2011 and 2013 reforms
2 / 55
Modeling the pension reforms
Motivation
Questions
How di�erent �scal closures of the pension system reform a�ectwelfare?
welfare e�ect of the reform (aggregate and across generations)?extent of �scal adjustment for di�erent �scal closurespensionsmacroeconomic variables
What are the e�ects of changes proposed/implemented recently?
additional welfare redistribution across cohortschanges to pensions and replacement rates�scal e�ect (debt/taxes) and capital
3 / 55
Modeling the pension reforms
Motivation
Questions
How di�erent �scal closures of the pension system reform a�ectwelfare?
welfare e�ect of the reform (aggregate and across generations)?extent of �scal adjustment for di�erent �scal closurespensionsmacroeconomic variables
What are the e�ects of changes proposed/implemented recently?
additional welfare redistribution across cohortschanges to pensions and replacement rates�scal e�ect (debt/taxes) and capital
3 / 55
Modeling the pension reforms
Model
Roadmap
1 Motivation
2 Model
3 Calibration
4 Welfare e�ects of �scal closures
5 Unprivatizing the pension system
6 Summary
4 / 55
Modeling the pension reforms
Model
Model overview
OLG model with endogenous labor and savings
Heterogeneity across cohorts (mortality and labor productivity)
No heterogeneity within cohorts
Agents have time inconsistent preferences
Exogenous retirement age and demographics
Competitive producers with CD production function
Pension system + pension system reform
Inter-generational transfers + utility to compare welfare across time withchanging demographics
Di�erent �scal closures (to do �scal rules)
Calibrated to the Polish economy
5 / 55
Modeling the pension reforms
Model
What we do not know before modeling?
1999 reform: DB PAYG ⇒ NDC + FDC = partially funded DC
part of contributions stay in the PAYG system (SIF)part of contributions shifted away (OPFs) + �scal tension todaylower replacement rates + ease �scal tension in futurecomparing the steady states is not enough - transitory welfare e�ects
BUT SIF gap needs to be �nanced ⇒ possible �scal closures with ownwelfare e�ects
�ve closures: lump sum, labor tax, consumption tax, debt + labor tax,debt + consumption taxwe cannot tell ex ante
which �scal closure is better?e�ect for savings, labor supply and output?
6 / 55
Modeling the pension reforms
Model
What we do not know before modeling?
1999 reform: DB PAYG ⇒ NDC + FDC = partially funded DC
part of contributions stay in the PAYG system (SIF)part of contributions shifted away (OPFs) + �scal tension todaylower replacement rates + ease �scal tension in futurecomparing the steady states is not enough - transitory welfare e�ects
BUT SIF gap needs to be �nanced ⇒ possible �scal closures with ownwelfare e�ects
�ve closures: lump sum, labor tax, consumption tax, debt + labor tax,debt + consumption taxwe cannot tell ex ante
which �scal closure is better?e�ect for savings, labor supply and output?
6 / 55
Modeling the pension reforms
Model
What we do not know before modeling?
1999 reform: DB PAYG ⇒ NDC + FDC = partially funded DC
part of contributions stay in the PAYG system (SIF)part of contributions shifted away (OPFs) + �scal tension todaylower replacement rates + ease �scal tension in futurecomparing the steady states is not enough - transitory welfare e�ects
BUT SIF gap needs to be �nanced ⇒ possible �scal closures with ownwelfare e�ects
�ve closures: lump sum, labor tax, consumption tax, debt + labor tax,debt + consumption taxwe cannot tell ex ante
which �scal closure is better?e�ect for savings, labor supply and output?
6 / 55
Modeling the pension reforms
Model
What we do not know before modeling?
1999 reform: DB PAYG ⇒ NDC + FDC = partially funded DC
part of contributions stay in the PAYG system (SIF)part of contributions shifted away (OPFs) + �scal tension todaylower replacement rates + ease �scal tension in futurecomparing the steady states is not enough - transitory welfare e�ects
BUT SIF gap needs to be �nanced ⇒ possible �scal closures with ownwelfare e�ects
�ve closures: lump sum, labor tax, consumption tax, debt + labor tax,debt + consumption taxwe cannot tell ex ante
which �scal closure is better?e�ect for savings, labor supply and output?
6 / 55
Modeling the pension reforms
Model
Consumers
Are free to choose how much to work, but only until J̄ (forced to retire)
Optimize lifetime utility derived from leisure and consumption
Uj(cj,t, lj,t) = uj(cj,t, lj,t) + β
J−j∑s=1
δsπj+s,t+sπj,t
u (cj+s,t+s, lj+s,t+s) (1)
subject to
(1 + τc,t)cj,t + sj,t + τj + Υt = (1− τ ιj,t − τl,t)wj,tlj,t ← labor income
+ (1 + rt(1− τk,t))sj,t−1 ← capital income
+ (1− τl,t)pι,j,t + bj,t ← pensions + bequests
where u(c, l) = φ log(c) + (1− φ) log(1− l)
7 / 55
Modeling the pension reforms
Model
Producers
maximize
Yt − wtLt − (rkt + d)Kt subject to Yt = Kαt (ztLt)
1−α
where the path of {z}∞t=0 is exogenous (calibrated to AWG, by EC)
Interest rate
interest rate on capital rkt = MPK − d, endogenous(riskless) interest rate on government debt to be rGt = 0.33 · rkthouseholds (and pension funds) by public debt inelastically
returns on savings yield a linear combination of risky and risk-less
8 / 55
Modeling the pension reforms
Model
Producers
maximize
Yt − wtLt − (rkt + d)Kt subject to Yt = Kαt (ztLt)
1−α
where the path of {z}∞t=0 is exogenous (calibrated to AWG, by EC)
Interest rate
interest rate on capital rkt = MPK − d, endogenous(riskless) interest rate on government debt to be rGt = 0.33 · rkthouseholds (and pension funds) by public debt inelastically
returns on savings yield a linear combination of risky and risk-less
8 / 55
Modeling the pension reforms
Model
Public �nances
SIF collects social security contributions and pays out pensions
subsidyt = τ ιt · wtLt −J∑j=J̄
bj,tπj,tNt−j (2)
any debt/surplus in SIF is government debt/surplus
Government
collects taxes on earnings, interest and consumption + Υ
spends �xed amount of GDP/money + services debt
long run debt/GDP ratio �xed
to �nance pension system can use taxes or debt ⇐ �scal closures
9 / 55
Modeling the pension reforms
Model
Public �nances
SIF collects social security contributions and pays out pensions
subsidyt = τ ιt · wtLt −J∑j=J̄
bj,tπj,tNt−j (2)
any debt/surplus in SIF is government debt/surplus
Government
collects taxes on earnings, interest and consumption + Υ
spends �xed amount of GDP/money + services debt
long run debt/GDP ratio �xed
to �nance pension system can use taxes or debt ⇐ �scal closures
9 / 55
Modeling the pension reforms
Model
Pension systems
initial steady state: PAYG De�ned Bene�t (DB), τ ιt = τDB
after the original reform: NDC + FDC (two pillars) τ = τ I + τ II
NDC = contributions indexed with growth of payroll + bene�tactuarially fair + post retirement indexation with 20% of payroll growthFDC = contributions earn interest + bene�t actuarially fair + postretirement also earn interest
JVR reform = �ve components:
(one o�) shift of bonds
(permanent) voluntary participation in FDC(permanent) FDC savings portfolio (mostly) has assets(permanent) reducing contribution rate to FDC
slider/zipper
10 / 55
Modeling the pension reforms
Model
Pension systems
initial steady state: PAYG De�ned Bene�t (DB), τ ιt = τDB
after the original reform: NDC + FDC (two pillars) τ = τ I + τ II
NDC = contributions indexed with growth of payroll + bene�tactuarially fair + post retirement indexation with 20% of payroll growthFDC = contributions earn interest + bene�t actuarially fair + postretirement also earn interest
JVR reform = �ve components:
(one o�) shift of bonds
(permanent) voluntary participation in FDC(permanent) FDC savings portfolio (mostly) has assets(permanent) reducing contribution rate to FDC
slider/zipper
10 / 55
Modeling the pension reforms
Model
Pension systems
initial steady state: PAYG De�ned Bene�t (DB), τ ιt = τDB
after the original reform: NDC + FDC (two pillars) τ = τ I + τ II
NDC = contributions indexed with growth of payroll + bene�tactuarially fair + post retirement indexation with 20% of payroll growthFDC = contributions earn interest + bene�t actuarially fair + postretirement also earn interest
JVR reform = �ve components:
(one o�) shift of bonds
(permanent) voluntary participation in FDC(permanent) FDC savings portfolio (mostly) has assets(permanent) reducing contribution rate to FDC
slider/zipper
10 / 55
Modeling the pension reforms
Model
Solution method: Gauss-Seidel algorithm
Start from the initial steady state
Assume the economy eventually achieves the new steady state
Reform is unexpected
Algorithm
Guess k per worker (or path) and compute wt, rtt = 0T
Compute individual choices (may need value functions).Aggregate to get new k
′(or path)
If |k − k′ | < err �nishJust in case ... check feasibility
No contraction mapping theorem
11 / 55
Modeling the pension reforms
Model
Solution method: Gauss-Seidel algorithm
Start from the initial steady state
Assume the economy eventually achieves the new steady state
Reform is unexpected
Algorithm
Guess k per worker (or path) and compute wt, rtt = 0T
Compute individual choices (may need value functions).Aggregate to get new k
′(or path)
If |k − k′ | < err �nishJust in case ... check feasibility
No contraction mapping theorem
11 / 55
Modeling the pension reforms
Model
Solution method: Gauss-Seidel algorithm
Start from the initial steady state
Assume the economy eventually achieves the new steady state
Reform is unexpected
Algorithm
Guess k per worker (or path) and compute wt, rtt = 0T
Compute individual choices (may need value functions).Aggregate to get new k
′(or path)
If |k − k′ | < err �nishJust in case ... check feasibility
No contraction mapping theorem
11 / 55
Modeling the pension reforms
Model
Solution method: Gauss-Seidel algorithm
Start from the initial steady state
Assume the economy eventually achieves the new steady state
Reform is unexpected
Algorithm
Guess k per worker (or path) and compute wt, rtt = 0T
Compute individual choices (may need value functions).Aggregate to get new k
′(or path)
If |k − k′ | < err �nishJust in case ... check feasibility
No contraction mapping theorem
11 / 55
Modeling the pension reforms
Model
How do we know what is "better"? LSRA!
Lump Sum Redistribution Authority as Nishiyama & Smetters (2007)
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the winners
4 If net e�ect positive ⇒ reform e�cient
5 Run reform again, with the compensation, to observe GE e�ects
What is baseline?
Always the same: births, mortality, productivity and retirement age
1999 Reform: baseline = PAYG DB | reform = NCD + FDC
JVR: baseline = NDC+FDC | reform = changes to features
12 / 55
Modeling the pension reforms
Model
How do we know what is "better"? LSRA!
Lump Sum Redistribution Authority as Nishiyama & Smetters (2007)
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the winners
4 If net e�ect positive ⇒ reform e�cient
5 Run reform again, with the compensation, to observe GE e�ects
What is baseline?
Always the same: births, mortality, productivity and retirement age
1999 Reform: baseline = PAYG DB | reform = NCD + FDC
JVR: baseline = NDC+FDC | reform = changes to features
12 / 55
Modeling the pension reforms
Model
How do we know what is "better"? LSRA!
Lump Sum Redistribution Authority as Nishiyama & Smetters (2007)
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the winners
4 If net e�ect positive ⇒ reform e�cient
5 Run reform again, with the compensation, to observe GE e�ects
What is baseline?
Always the same: births, mortality, productivity and retirement age
1999 Reform: baseline = PAYG DB | reform = NCD + FDC
JVR: baseline = NDC+FDC | reform = changes to features
12 / 55
Modeling the pension reforms
Model
How do we know what is "better"? LSRA!
Lump Sum Redistribution Authority as Nishiyama & Smetters (2007)
1 Run the no policy change scenario ⇒ baseline
2 Run the policy change scenario ⇒ reform
3 For each cohort compare utility, compensate the losers from the winners
4 If net e�ect positive ⇒ reform e�cient
5 Run reform again, with the compensation, to observe GE e�ects
What is baseline?
Always the same: births, mortality, productivity and retirement age
1999 Reform: baseline = PAYG DB | reform = NCD + FDC
JVR: baseline = NDC+FDC | reform = changes to features
12 / 55
Modeling the pension reforms
Calibration
Roadmap
1 Motivation
2 Model
3 Calibration
4 Welfare e�ects of �scal closures
5 Unprivatizing the pension system
6 Summary
13 / 55
Modeling the pension reforms
Calibration
Baseline: no of births (20 year olds):
Demographic projection (2060), constant afterwards (conservative)
14 / 55
Modeling the pension reforms
Calibration
Baseline: mortality rates
Demographic projection (2060), constant afterwards
15 / 55
Modeling the pension reforms
Calibration
Baseline: old age dependency ratio
Demographic projection (2060), constant afterwards
16 / 55
Modeling the pension reforms
Calibration
Baseline: labor augmenting technological progress
Historical data, projection from AWG, new steady state at 1.7%
17 / 55
Modeling the pension reforms
Calibration
Baseline: retirement age
Historical data, assumed (based on law) afterwards
18 / 55
Modeling the pension reforms
Calibration
Baseline (outcomes): pension bene�ts in GDP
Aging plus decreasing labor force
19 / 55
Modeling the pension reforms
Calibration
Calibration to replicate 1999 economy
Preference for leisure (φ) matches participation rate of 56.8%Replacement rate (ρ) matches bene�ts/GDP ratio of 5%Contributions rate (τ) matches SIF de�cit/GDP ratio of 0.8%Labor income tax (τl) set to 11% to match PIT/GDP ratioConsumption tax (τc) set to match VAT/GDP ratioCapital tax (τk) de iure = de facto
The initial capital
20 / 55
Modeling the pension reforms
Calibration
Life cycle productivity: �at or Deaton (1997)
21 / 55
Modeling the pension reforms
Calibration
Parameters for di�erent calibrations
Calibrated parameters
β = 1 β = 0.9 β = 0.8ω = 1 ω - D97 ω = 1 ω - D97 ω = 1 ω - D97
φ 0.538 0.576 0.535 0.5772 0.537 0.579δ 0.981 0.998 0.99 1.0033 0.994 1.009d 0.0415 0.055 0.053 0.055 0.055 0.06tl 0.11 0.11 0.11 0.11 0.11 0.11τ 0.063 0.0603 0.0608 0.0608 0.0606 0.0611ρ 0.27 0.15 0.253 0.153 0.255 0.155
resultingxt/yt 21.1 21.2 21.2 21.2 21.1 21.1r 7.5 7.5 7.5 7.5 7.5 7.5
Note: D97: Deaton (1997) decomposition.
22 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Roadmap
1 Motivation
2 Model
3 Calibration
4 Welfare e�ects of �scal closures
5 Unprivatizing the pension system
6 Summary
23 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results
SIF de�cit resulting from the reform is �nanced ...
... by labor tax or consumption tax
⇒ debt share in GDP is held constant, so are taxes, but τl or τc is adjustedamong all the living
... by debt which is later repaid with labor or consumption tax
⇒ debt share in GDP grows to a threshold of 70%, with all taxes heldconstant, then debt gets automatically reduced to 45% of GDPexponentially, τc or τl is adjusted for living then onwards
... by lump sum taxes on all living generations
⇒ debt share in GDP and tax rates are held constant, Υ is adjusted amongall the living
24 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results
SIF de�cit resulting from the reform is �nanced ...
... by labor tax or consumption tax
⇒ debt share in GDP is held constant, so are taxes, but τl or τc is adjustedamong all the living
... by debt which is later repaid with labor or consumption tax
⇒ debt share in GDP grows to a threshold of 70%, with all taxes heldconstant, then debt gets automatically reduced to 45% of GDPexponentially, τc or τl is adjusted for living then onwards
... by lump sum taxes on all living generations
⇒ debt share in GDP and tax rates are held constant, Υ is adjusted amongall the living
24 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results
SIF de�cit resulting from the reform is �nanced ...
... by labor tax or consumption tax
⇒ debt share in GDP is held constant, so are taxes, but τl or τc is adjustedamong all the living
... by debt which is later repaid with labor or consumption tax
⇒ debt share in GDP grows to a threshold of 70%, with all taxes heldconstant, then debt gets automatically reduced to 45% of GDPexponentially, τc or τl is adjusted for living then onwards
... by lump sum taxes on all living generations
⇒ debt share in GDP and tax rates are held constant, Υ is adjusted amongall the living
24 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Welfare
LSRA after redistribution (% of perm. cons.)
Fiscal β = 1 β = 0.9 β = 0.8closure �at D97 �at D97 �at D97
τl 1.2% 0.6% 0.8% 0.4% 0.5% 0.2%Debt/τl 1.3% 0.6% 0.8% 0.4% 0.5% 0.2%τC 1.2% 0.7% 0.8% 0.4% 0.5% 0.3%Debt/τC 1.2% 0.6% 0.8% 0.4% 0.5% 0.2%Υt 1.2% 0.7% 0.8% 0.4% 0.4% 0.2%
Note: D97 denotes calibration according to Deaton (1997) decomposition.
25 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Fiscal adjustment
Extent of �scal adjustment - debt/consumption tax
Reform: Higher taxes initially, become lower after a while.
26 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Fiscal adjustment
Extent of �scal adjustment - debt/labor tax
Reform: Higher taxes initially, become lower after a while.
27 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Fiscal adjustment
Extent of �scal adjustment - labor tax
Higher taxes initially, become lower after a while.
28 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Fiscal adjustment
Extent of �scal adjustment - consumption tax
Higher taxes initially, become lower after a while.
29 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Fiscal adjustment
Extent of �scal adjustment - lump sum tax
Higher taxes initially, become lower after a while.
Note; lump sum taxes have real e�ects (redistribution)
30 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Pensions
Replacement rates - relative to baseline
Pensions are substantially reduced by PAYG DB → DC
Fiscal closure matters little
Initial cohorts una�ected
31 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Macroeconomic e�ects
Closure GDP Labor supply CapitalPeriod D97 ω �at ω D97 ω �at ω D97 ω �at ω
10 0.6% 0.7% -0.9% -0.5% 1.8% 2.3%Labor tax 50 2.2% 2.0% -1.3% 0.9% 7.2% 6.4%
∞ 2.5% 2.1% -1.2% 0.4% 8.3% 7.0%10 0.6% 0.7% -0.8% -0.2% 1.9% 2.4%
Consumption 50 2.9% 2.7% -0.6% 1.1% 9.8% 9.1%tax ∞ 2.4% 2.0% -0.9% 0.5% 7.8% 6.7%
10 0.2% 0.2% -0.3% 0.1% 0.6% 0.5%Debt with 50 2.0% 1.8% -1.1% 1.1% 6.7% 5.8%τl ∞ 2.5% 2.1% -1.2% 0.4% 8.3% 7.0%
10 0.2% 0.1% -0.4% 0.1% 0.6% 0.4%Debt with 50 3.0% 2.8% -0.5% 1.1% 10.0% 9.2%τl ∞ 2.3% 2.0% -0.9% 0.5% 7.8% 6.7%
10 0.5% 0.6% -0.2% 0.4% 1.7% 2.1%Lump sum 50 2.2% 2.0% -1.9% -0.5% 7.3% 6.7%tax ∞ 2.6% 2.0% -2.3% -0.5% 8.5% 6.6%
32 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Distribution of welfare e�ects
Welfare: all closures, no time inconsistency
33 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Decomposition of welfare e�ects
Decomposition - consumption tax (left) anddebt/consumption tax (right)
34 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Decomposition of welfare e�ects
Decomposition - labor tax (left) and debt/labor tax (right)
35 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Time inconsistency
Time inconsistency - matters little for capital
Capital - consumption tax closure and debt closure with consumption tax
36 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
Results: Time inconsistency
Time inconsistency - preserves the general �ndings
Welfare - consumption tax closure and debt with consumption tax closure
37 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
1999 reform - summary
Generally, 1999 reform is welfare enhancing
Our model calibrated to 1999 Polish economy
Shows that welfare overall e�ects positive, but �scal closure matters for(cohort) composition e�ects
Considerable redistribution across cohorts needed
Introduction of FDC makes debt desirable (redistributes)
Pensions fall
To do
Log utility: taxes a�ect labor marginally (GHH preferences)
Endogenous retirement
38 / 55
Modeling the pension reforms
Welfare e�ects of �scal closures
1999 reform - summary
Generally, 1999 reform is welfare enhancing
Our model calibrated to 1999 Polish economy
Shows that welfare overall e�ects positive, but �scal closure matters for(cohort) composition e�ects
Considerable redistribution across cohorts needed
Introduction of FDC makes debt desirable (redistributes)
Pensions fall
To do
Log utility: taxes a�ect labor marginally (GHH preferences)
Endogenous retirement
38 / 55
Modeling the pension reforms
Unprivatizing the pension system
Roadmap
1 Motivation
2 Model
3 Calibration
4 Welfare e�ects of �scal closures
5 Unprivatizing the pension system
6 Summary
39 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Introduced changes
JVR = changes to the pension system
2011 reform plus three policy options in 2013 reforms a�ectprivate savings and public debt (shift of bonds, przesuniecie obligacji)amount of savings in FDC
voluntary participation (voluntariness, doborowolnosc)split between τ1 and τ2 (shift of contributions, przesuniecie skladki)
portfolio structure of FDC (portfolio, portfel)the way pensions are paid out (slider, suwak)
these changes too a�ect di�erent cohorts di�erently
overall welfare e�ects undetermined
Objectives
with two �scal closures: VAT cut or debt reduction ...
... evaluation of these amendments vs. status quo of unchanged pensionsystem
40 / 55
Modeling the pension reforms
Unprivatizing the pension system
Macroeconomic e�ects
Public debt in debt/tax closure (relative to baseline)
Fiscal situation improves (which translates into lower debt)
41 / 55
Modeling the pension reforms
Unprivatizing the pension system
Macroeconomic e�ects
Capital: debt reduction (left) and tax cut (right)
Fiscal situation improves: debt or taxes may fall
Long run: capital falls by up to 2%
Short run: increases or declines depending on behavior of debt.
42 / 55
Modeling the pension reforms
Unprivatizing the pension system
Macroeconomic e�ects
Return rates from pillars
Growth rate of GDP vs. interest rate (implied by the model)
43 / 55
Modeling the pension reforms
Unprivatizing the pension system
Macroeconomic e�ects
Replacement rates in relation to status quo
44 / 55
Modeling the pension reforms
Unprivatizing the pension system
Macroeconomic e�ects
Pensions in relation to status quo
45 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Zipper/slider (with tax closure)
46 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Shift of contributions (with tax closure)
47 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Voluntary participation (50%) (with tax closure)
48 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Change in portfolio structure (only assets) (with tax closure)
49 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
All e�ects combined (with tax closure)
50 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
All e�ects combined (both closures)
51 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Welfare (LSRA)
Welfare decline mainly due to
Lower pensions (due to lower replacement rates and unfavorablepost-retirement indexation)
Our model is veeeery merciful
no change in government expenditure (actual welfare gains materialize)no within-cohort heterogeneity (no minimum pension bene�t)�nal steady state population stationary
52 / 55
Modeling the pension reforms
Unprivatizing the pension system
Welfare consequences
Welfare (LSRA)
Welfare decline mainly due to
Lower pensions (due to lower replacement rates and unfavorablepost-retirement indexation)
Our model is veeeery merciful
no change in government expenditure (actual welfare gains materialize)no within-cohort heterogeneity (no minimum pension bene�t)�nal steady state population stationary
52 / 55
Modeling the pension reforms
Summary
Roadmap
1 Motivation
2 Model
3 Calibration
4 Welfare e�ects of �scal closures
5 Unprivatizing the pension system
6 Summary
53 / 55
Modeling the pension reforms
Summary
Proposed reform scenarios - summary
Pensions decline (except in the 'portfolio' scenario)
Public and debt will be:
lower due to the �zipper/slider�, the shift of contributions and thevoluntary participation in OPFsthe shift of bonds - a one-o� e�ect
The change in GDP depends on the �scal closure (crowding out)
decrease in debt boosts capital accumulation and in turn GDP(transitory)in the long-run lower level of capital than in status-quo
54 / 55
Modeling the pension reforms
Summary
Proposed reform scenarios - summary
Pensions decline (except in the 'portfolio' scenario)
Public and debt will be:
lower due to the �zipper/slider�, the shift of contributions and thevoluntary participation in OPFsthe shift of bonds - a one-o� e�ect
The change in GDP depends on the �scal closure (crowding out)
decrease in debt boosts capital accumulation and in turn GDP(transitory)in the long-run lower level of capital than in status-quo
54 / 55
Modeling the pension reforms
Summary
Proposed reform scenarios - summary
Pensions decline (except in the 'portfolio' scenario)
Public and debt will be:
lower due to the �zipper/slider�, the shift of contributions and thevoluntary participation in OPFsthe shift of bonds - a one-o� e�ect
The change in GDP depends on the �scal closure (crowding out)
decrease in debt boosts capital accumulation and in turn GDP(transitory)in the long-run lower level of capital than in status-quo
54 / 55
Modeling the pension reforms
Summary
Welfare e�ects of �unprivatizing�?
The 2013 reform is a combination of �ve components:
Voluntary participation in OPFs (assumption of 50% participation)One-o� shift of bonds from OPFs back to governmentShift of contributionsA change in the portfolio structureThe �slider�
Overall welfare e�ect - negative (each component has negative e�ects)
SIF de�cit goes down - debt or taxes may fall
Welfare reduction mainly via lower pensions (some GE e�ects)
Capital stock declines in the long run, in the short run adjustmentdepends on �scal closure
55 / 55
Modeling the pension reforms
Summary
Welfare e�ects of �unprivatizing�?
The 2013 reform is a combination of �ve components:
Voluntary participation in OPFs (assumption of 50% participation)One-o� shift of bonds from OPFs back to governmentShift of contributionsA change in the portfolio structureThe �slider�
Overall welfare e�ect - negative (each component has negative e�ects)
SIF de�cit goes down - debt or taxes may fall
Welfare reduction mainly via lower pensions (some GE e�ects)
Capital stock declines in the long run, in the short run adjustmentdepends on �scal closure
55 / 55
Modeling the pension reforms
Summary
Welfare e�ects of �unprivatizing�?
The 2013 reform is a combination of �ve components:
Voluntary participation in OPFs (assumption of 50% participation)One-o� shift of bonds from OPFs back to governmentShift of contributionsA change in the portfolio structureThe �slider�
Overall welfare e�ect - negative (each component has negative e�ects)
SIF de�cit goes down - debt or taxes may fall
Welfare reduction mainly via lower pensions (some GE e�ects)
Capital stock declines in the long run, in the short run adjustmentdepends on �scal closure
55 / 55
Modeling the pension reforms
Summary
Welfare e�ects of �unprivatizing�?
The 2013 reform is a combination of �ve components:
Voluntary participation in OPFs (assumption of 50% participation)One-o� shift of bonds from OPFs back to governmentShift of contributionsA change in the portfolio structureThe �slider�
Overall welfare e�ect - negative (each component has negative e�ects)
SIF de�cit goes down - debt or taxes may fall
Welfare reduction mainly via lower pensions (some GE e�ects)
Capital stock declines in the long run, in the short run adjustmentdepends on �scal closure
55 / 55
Modeling the pension reforms
Summary
Welfare e�ects of �unprivatizing�?
The 2013 reform is a combination of �ve components:
Voluntary participation in OPFs (assumption of 50% participation)One-o� shift of bonds from OPFs back to governmentShift of contributionsA change in the portfolio structureThe �slider�
Overall welfare e�ect - negative (each component has negative e�ects)
SIF de�cit goes down - debt or taxes may fall
Welfare reduction mainly via lower pensions (some GE e�ects)
Capital stock declines in the long run, in the short run adjustmentdepends on �scal closure
55 / 55