The Japanese Government has commissioned a series of international research projects – called “The Collaboration Projects” – focussing on the challenges of old-age provision in ageing societies and of environmental problems. Ifo’s “ageing team” contributes a European perspective on problems of financing for old-age pensions as well as on issues in pension reform. An important sub-task is given by highlighting the impact of demographic ageing on existing public pension schemes in selected OECD countries. Building on these results, the effects of current pensions reforms for the inter-generational distribution of burdens associated with ageing are demonstrated and discussed. The debate on the efficiency of unfunded pension schemes is extended, taking into account potential distortions of individual decisions regarding the inter-temporal structure of labour supply, both from a theoretical and an empirical perspective. Finally, potential lessons for further pension reform are addressed.
A simplified accounting framework – the CESifo pension model – is used to show how ageing affects the public pension schemes in a number of European countries, Japan and the US, taking into account many details of national institutions. For the analysis of life-cycle labour supply, results obtained from a stylised OLG model are combined with optimum taxation rules, thus yielding predictions regarding the optimal timing of effective social security taxes. Then, the theoretical results are confronted with estimates regarding the wage elasticity of labour supply over individual life cycles, taking Germany as an example. Estimations are based on a simple, static Tobit model with labour supply being measured in terms of hours worked on a regular basis.
Information on social security systems on an international level are gathered from national social security boards as well as from comparative studies of EU-level authorities and the US Social Security Administration. For the empirical study of labour supply, micro-level data are taken from the German Socio-Economic Panel (GSOEP).
Building on a review of concepts that have been applied to measuring potential imbalances involved in public pension schemes in the context of large-scale demographic ageing, the analysis centres around the notion of an “implicit tax” that is involved in many systems of public old-age provision because, without proper pre-funding, the returns to social security contributions are generally lower than those required by actuarial fairness. While this is a fundamental property of any pay-as-you-go pension scheme, the actual pattern of implicit taxes across generations is heavily influenced by the process of demographic ageing.
Building on earlier work by Thum and Weizsäcker (2000), we therefore simulate the profiles of implicit tax rates falling on typical agents born 1940 through 2000 for selected OECD countries (among others, Germany, France, Italy, Japan, Sweden, the UK, and the US). The results obtained from these simulations are largely as expected. In virtually all the countries covered, implicit tax rates are sharply increasing for generations who are currently young when compared to their parents and grand-parents. As a wide-spread regularity, countries are slow in scaling back their pension schemes in response to population ageing. Contribution rates levied from younger age cohorts therefore must go up, and implicit tax rates are rising over time. At the same time, our results exhibit a lot of variation across countries in the overall level of implicit tax rates, in the speed of adjustments, and in the impact of corrective measures that have already been taken or are under scrutiny at least. In fact, comparing both the role of institutional features for actual tax patterns as well as the effectiveness of different types of pension reform is one of the major ambitions pursued in our simulations.
As a second step, the structure of implicit taxes across individual life cycles is explored in much more detail for the case of Germany. It is shown that implicit tax rates will generally decrease over a typical life cycle. Against the background of conventional optimum taxation theory, this pattern would be rational only if the decline of tax rates is paralleled by an increase in the elasticity of periodic labour supply. In addition, rules regarding pension benefits for married women largely imply the existence of a “gender tax-gap”, implicit taxes being substantially higher for females than for males in many countries. Again, this would be an optimal structure of taxes only if on average labour supply of women were less elastic with respect to wages than for the case of men. While in existing studies the latter finding is not supported by empirical results, analyses of age-specific labour supply decisions are largely lacking in the literature.
We therefore use micro-data taken from the GSOEP survey in order to investigate the time-structure of wage elasticities of labour supply for both males an females, the relation of wage elasticities between men and (married) women. More precisely, we look at the age-related profile of both implicit tax rates and wage elasticities for age groups defined over 20-year intervals (“young” vs. “old”) and, alternatively, over 5-year intervals (thus obtaining a more detailed picture), attempting to control for potential cohort effects that may arise in our set-up. Our main conclusions are as follows. The inter-temporal structure of implicit tax rates is largely efficient, since wage elasticities of labour supply tend to increase over a typical life cycle for both men and women. If looked at in more detail, it turns out that the taxes imposed on very young workers – i.e., those who are just entering the labour market – may be too high, thus creating a barrier to full-time participation. At the same time, for those who are near retirement, the low taxes observed in reality could still be too high. Both these effects are more pronounced in the case of males than for females. A strong result that emerges from our estimates is that, as one would expect, the “gender tax-gap” that is due to typical rules that govern survivor benefits (and, in some countries, also spouse benefits that accrue when husbands are still alive) clearly violates the principles of optimum taxation.
Finally, we discuss the policy implications of our findings. Returning to the observation that, to a large extent, actual pension reforms effectively redistribute a given amount of burden we also look at a number of criteria of distributional justice and inter-generational fairness. Here, we are trying to spell out what, if anything, diverging approaches imply for reforming existing pension schemes in the context of ageing populations.
R. Fenge and M. Werding (2001), Old-age provision in ageing societies: equity, efficiency, and sustainability (Interim Report), mimeo, Munich: Ifo Institute.
R. Fenge, S. Übelmesser and M. Werding (2002), Old-age provision in ageing societies: equity, efficiency, and sustainability (Final Report), mimeo, Munich: Ifo Institute.
Fenge, Robert, Silke Uebelmesser and Martin Werding, "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence", CESifo Working Paper Nr. 743, 2002 ( Abstract / Download )
Fenge, Robert and Martin Werding, "Ageing and the tax implied an public pemion schemes: Simulation for selected OECD countries", CESifo Working Paper No. 841, 2003 ( Abstract / Download )
Fenge, Robert and Martin Werding, "Ageing and the tax implied an public pemion schemes: Simulation for selected OECD countries", CESifo Working Paper No. 842, 2003 ( Abstract / Download )
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