Planning for the optimal mix of paygo tax and funded savings

Georges de Ménil · Fabrice Murtin

49 citations0/0 files storedJournal of Pensions Economics and Finance

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Financial Literacy, Pension, Retirement Analysis Retirement, Disability, and Employment Economic Policies and Impacts

Abstract

We analyze the optimal balance between social security taxation and private saving in the provision of retirement income in dynamically efficient economies, a question at the center of policy debates in Europe and the United States. We consider the relative importance for this question of the return to capital, the internal return of the pay-as-you-go system, and the variabilities and correlation (or independence) of labor earnings and the capital return. We analyse these influences theoretically in the context of a two-period, overlapping generations model with uncertainty. We use a new method to calibrate the model using annual data on GDP per worker and the total real return on equities, from 1950 to 2002, from which we infer the stochastic characteristics of lifetime labor income and the return to lifetime savings in the US, UK, France and Japan. We obtain a range of optimal, steady-state values of the social security tax and the rate of lifetime savings. When the relative rate of risk aversion is assumed to be 2.5, the computed optimal tax varies from 5% in the United States to 22% in Japan. France is similar to Japan, and the UK is in between.

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References

1989Assessing Dynamic Efficiency: Theory and Evidence 1966The Social Insurance Paradox 1988Intergenerational risk sharing 1995SOCIAL SECURITY AND SAVING: NEW TIME SERIES EVIDENCE 1981On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital Is Not Tradeable 2000A portfolio approach to the optimal funding of pensions

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2017Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution 2012Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World 2009The Optimal Mix Between Funded and Unfunded Pension Systems When People Care About Relative Consumption 2006Intergenerational Risk Sharing by Means of Pay-as-You-Go Programs - an Investigation of Alternative Mechanisms 2019Optimal investment strategies and risk-sharing arrangements for a hybrid pension plan 2016Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model 2015OPTIMAL MIX BETWEEN PAY AS YOU GO AND FUNDING FOR PENSION LIABILITIES IN A STOCHASTIC FRAMEWORK

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