Coping with Spain’s Aging: Retirement Rules and Incentives Mario Catalán, Jaime Guajardo, and Alexander W. Hoffmaister* International Monetary Fund
Social Security and Aging Workshops NBER Summer Institute 2006 July 26, 2006
* The views expressed in this presentation are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management. 1
Motivation
Demographic shock: population aging
Lower fertility rates Higher life expectancy
Rising old-age dependency ratio
Macroeconomic challenges: preserving fiscal sustainability, employment, growth and inter-generational equity
Spain provides an interesting case study due to its:
social arrangements:
broad political consensus to preserve the public PAYG system
pension reforms:
increasing the retirement age and extending the averaging period
pension rules:
benefits based on average inflation-indexed wage earnings in the averaging period
demographic profile:
dependency ratio set to increase more sharply than in other European countries
This paper … Questions What are the macroeconomic effects of aging if no reforms are introduced?
Strategy Quantifies these effects using a OLG framework in the A-K tradition
What are the effects of pension reforms Quantifies the effects of: consistent with Spain’s political consensus? Extending the averaging period Increasing the retirement age Alternative tax policies
Focus and Main Contribution:
General equilibrium effects of extending the averaging period including interaction with:
inflation-indexation of wage earnings household’s hump-shaped labor skills profile technological progress 3
Main Results Pension expenditure (percentage points of output in 2008-50)
Consumption tax rate (percentage points)
Macro effects
+16
+32
Severe
+12
+25
Less severe
bust -boom cycle
+8
+18
Further limited
boom -bust cycle
No reform
+16
+6.4
Severe
Increasing the retirement age
+12
+5.2
Less severe
+8
+4.4
Further limited
Reform scenario:
Aggregate employment
Tax-as-you-go No reform (baseline) Increasing the retirement age (partial reform) ...and extending averaging period (full reform) Tax smoothing
(partial reform) ...and extending averaging period (full reform)
4
Main Results Contribution of extending the averaging period:
Tax-as-you-go:
Demographic peak (2050): accounts for a half of the tax rate
reduction.
Long-term: accounts for a tenth of the tax rate reduction. Tax-smoothing: accounts for a third of the tax rate reduction.
Long-term effects:
maximum welfare if averaging period is extended to the entire work life (with historical technological progress); averaging period is shorter than the entire work life (with no technological progress).
5
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
1. Model.
Overview:
OLG model (Auerbach-Kotlikoff tradition) Agents:
Households:
Exogenous, time-varying life expectancy. Exogenous working life and retirement period. Endogenous labor supply - Choose hours worked per year. Accumulate assets (physical capital and government bonds). Pay taxes: consumption, income and payroll. Receive pension benefits when retired.
Firms: Employ labor and capital to max. profits. Government: Collects consumption, income and payroll taxes to
finance government consumption and investment, pay for pension benefits and redeem government debt.
Population growth at varying rates 7
1. Model.
Key Features of the Model:
Public health-related consumption varies with the population’s age structure
Stylized version of the Spanish pension rule
Technological progress
Household’s labor skills (productivity) vary exogenously with age
8
1. Model.
Households maximize lifetime utility
Tt +Tt R
∑ s =1
β s −1 ⋅ {log(cts+ s −1 ) + γ ⋅ log(lts+ s −1 )} ;
1 = lts+ s −1 + nts+ s −1
Budget constraint during work life
(1+ ξ ) ⋅ Ats++s1 = [1+ rt +s−1 ⋅ (1−τtI+s−1)]⋅ Ats+s−1 + (1−τt +s−1 −τtI+s−1) ⋅Wt +s−1 ⋅ es ⋅ nts+s−1 − (1+τtc ) ⋅ cts+s−1
Budget constraint during retirement
(1 + ξ ) ⋅ Ats++s1 = [1 + rt + s −1 ⋅ (1 − τ tI+ s −1 )] ⋅ Ats+ s −1 +
btT+t T+t1 (1 + ξ ) s −Tt −1
− (1 + τ tc+ s −1 ) ⋅ cts+ s −1
No bequests
Taking the tax and wage rates, and rates of return as given
Tt +Tt R +1 t
A =A 1 t
=0
9
1. Model.
Household’s old-age pension Tt +1 t +Tt
b
=ψ ⋅
1
μ
where
{c
⋅
μ
Tt
Wt + j −1
∑ μ (1 + ξ )
j =Tt +1−
Tt +1− j
⋅ e j ⋅ ntj+ j −1 ,
is the length of the averaging period (years)
Household’s problem can be written as:
Max
Tt
T T +1 T +1 s −1 s s β ⋅ log( c ) + γ ⋅ log( l ) + β ⋅ V ( A , b { } ∑ t + s −1 t + s −1 t +T t +T ) t
}
s s s +1 Tt t + s −1 ,lt + s −1 , At + s s =1
t
t
t
s =1
t
s.t. constraints
10
1. Model.
Household’s Optimization – First Order Conditions (I) Work Life
γ
Before Averaging Period
lts+ s −1
I [1 + rt + s ⋅ (1 − τ t + s )] (1 + ξ ) = β ⋅ s +1 s c ct + s −1 ⋅ (1 + τ t + s −1 ) ct + s ⋅ (1 + τ tc+ s )
( s = 1,..., Tt − μ )
γ During Averaging Period
Wt + s −1 ⋅ e s ⋅ (1 − τ t + s −1 − τ tI+ s −1 ) = cts+ s −1 ⋅ (1 + τ tc+ s −1 )
lts+s−1
( s = Tt − μ + 1,..., Tt − 1)
Wt +s−1 ⋅ es ⋅ (1−τ t +s−1 −τ tI+s−1 ) β Tt +1−s Tt +1 Tt +1 s ψ ⋅ = + W ⋅ e ⋅ ⋅ V ( A , b t + s −1 b t +Tt t +Tt ) Tt +1−s s c μ (1+ ξ ) ct +s−1 ⋅ (1+τ t +s−1 ) I [1 + rt + s ⋅ (1 − τ t + s )] (1 + ξ ) = β ⋅ s +1 s c c t + s −1 ⋅ (1 + τ t + s −1 ) c t + s ⋅ (1 + τ tc+ s )
11
1. Model.
Household’s Optimization – First Order Conditions (II) Work Life
γ Last Year Before Retirement
ltT+t Tt −1
( s = Tt )
=
Wt +Tt −1 ⋅ es ⋅ (1−τt +Tt −1 −τtI+Tt −1) ctT+t Tt −1 ⋅ (1+τtc+Tt −1)
+ Wt +T −1 ⋅ e t
s
⋅
ψ β ⋅ ⋅ Vb ( A μ (1+ ξ )
Tt +1 t +Tt
T +1
, bt +t Tt )
(1 + ξ ) Tt +1 Tt +1 = β ⋅ V ( A , b A t + Tt ) t + Tt Tt c ct +Tt −1 ⋅ (1 + τ t +Tt −1 ) Retirement
Retirement
β ⋅ [1 + rt + s ⋅ (1 − τ tI+ s )] (1 + ξ ) = s c c t + s −1 ⋅ (1 + τ t + s −1 ) c ts++s1 ⋅ (1 + τ tc+ s )
( s = Tt + 1,..., Tt + Tt R − 1) 12
1. Model.
Firms maximize profits Π = Ζ ⋅ ( Kt f t
f
)
α
⋅ ( Nt
f
)
1−α
− (rt + δ ) ⋅ K t f − Wt ⋅ N t f ,
first order conditions α
⎛ Kt ⎞ Wt = Ζ ⋅ (1 − α ) ⋅ ⎜ t ⎟ , ⎝ Nt ⎠ f
⎛ Kt ⎞ rt = Ζ ⋅ α ⋅ ⎜ t ⎟ ⎝ Nt ⎠ f
− (1−α )
−δ.
Government Primary Deficit (excluding Social Security)
Pt +1 Dt +1 ⋅ (1 + ξ ) ⋅ = (1 + rt ) ⋅ Dt + [Gt − τ tI ⋅ (rt ⋅ Ath + Wt ⋅ N th ) − τ tc ⋅ Cth ] Pt Tt +Tt R
btT+t T+t1+1− s
Pt s h + ∑ ⋅ − τ ⋅ ⋅ W N t t t , s −Tt −1 Pt s =Tt +1 (1 + ξ ) Social Security Deficit
13
1. Model.
Equilibrium
A collection of households’ lifetime plans
{c
A sequence of allocations for the firms
{K
A sequence of government policy variables
{τ ,τ
s t + s −1 f t
t
s t + s −1
,l
}
R s +1 Tt +Tt t + s s =1
,A
, Nt f }
∞
t =0
I t
,τ tc , Gt , Dt }
∞
t =0
such that
Households and firms solve their optimization problems
The government budget constraint is satisfied
The labor market clears
The asset market clears
The output market clears
Tt
Pt s Nt = Nt = N = ∑e ⋅ n ⋅ Pt s=1 R s T +T f h s Pt Kt + Dt = At = ∑ At ⋅ Pt s =1 P K t +1 ⋅ (1 + ξ ) ⋅ t +1 = (1 − δ ) ⋅ K t + Yt − Ct − Gt Pt f
h t
s
s t
14
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
15
2. Calibration.
Balance growth equilibrium
Constant rate of population growth; Fiscal policy: constant tax rates, debt-output and expenditure-output ratios; Constant work life and retirement period; Variable Y t, C t, K t, Dt, Gt,
Growth rate Tt + Tt
∑
R
s b$ t ⋅ Pt s
p + ξ + p ⋅ξ
s = Tt + 1 R
R
T +1 1 T +T 2 T +T W t , b$ t +T , (c$ t ,..., c$ t ), ( $At ,..., $At )
Nt rt , (nt1 ,..., ntT )
ξ p 0
Expressed as a steady state in stationary-transformed variables (adjusted by technological progress and population growth)
Calibration of the model in this steady state. 16
2. Calibration.
Symbol
Model’s Parameters (I) (Initial Steady State)
α
Definition
Value
Source
Share of capital
0.33
γ
Fernandez de Cordoba and Kehoe (2000) ; Estrada et al. (2004).
Leisure preference
1.87
Value set so that the fraction of working time for the representative household is 0.274.
β
Discount factor
0.95
From the real business cycle literature.
δ
Depreciation rate
0.06
From the real business cycle literature.
Z
Total factor productivity
0.61
Value set so that the capital-output ratio is 2.01.
τ
Social security payroll tax rate
0.195
Social security contributions over wage income.
τc
Consumption tax rate
0.189
Indirect tax revenues as percentage of private consumption (average 1994-2004).
τI
Capital-income tax rate
0.136
Direct tax revenues and other current revenues as percentage of GDP (average 1994-2004).
p
Rate of population growth
0.0085
Average 1900-1970.
17
2. Calibration.
Model’s Parameters (II) (Initial Steady State)
Symbol
Definition
Value
Source
G/Y
Government consumption (fraction of output)
0.228
D/Y
Government debt (fraction of output)
0.41
ψ
Replacement ratio
0.544
μ
Averaging period
15
ξ
Rate of labor-augmenting technological progress
0.015
Τ
Work life (years)
40
Set to match individuals' entry to the labor force at age 22 and retirement at age 62.
ΤR
Retirement life (years)
18
Households live 80 years with certainty.
Average 1994-2004.
General government (includes regional governments), 2004. Value set so that the pension at retirement over the (net) average wage income for the working population is 0.65. 15 years is the reference period since the reform of 1997. Set to result in a 1.5 percent annual rate of output per capita growth (average).
18
2. Calibration.
Labor Skills Profile (by age in the model)
Labor Skills Profile 2.0 1.9
Skill level (relative to newborn's skill)
1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 1
3
5
7
9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 Age (years)
19
2. Calibration.
Health Care Expenditure by Age Group Health Care Expenditure by Age Group (percent of GDP per capita)
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0
9
4
9
4
9
4
65- 6
70- 7
75- 7
80- 8
85- 8
90- 9
95+
4 60- 6
4 40- 4
9
9 35- 3
55- 5
4 30- 3
4
9 25- 2
50- 5
4 20- 2
9
9 15- 1
Source: OECD (2003).
45- 4
4 10- 1
5- 9
0- 4
0.0
Age (years)
20
2. Calibration.
Initial Steady State:
Household’s Labor Effort, Asset Holdings and Consumption Profiles by Age Labor Effort
0.45
Asset Holdings
2.2
0.40
1.7
0.35
1.2
0.30
0.7
0.25 0.20
0.2
0.15 -0.3
0.10 1
3
5
7
9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
1
4
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Age (years)
Age (years)
Consumption
0.35 0.30 0.25 0.20 0.15 0.10 1
4
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Age (years)
21
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
22
3. Demographic transition
Dependency Ratio Figure 2. Model's Dependency Ratio 80 70 60 50 40 30
2130
2120
2110
2100
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
1990
20 1980
Retired over working population (percent)
90
Year Low Immigration
High Immigration
23
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
24
4. Baseline simulations. Consumption Tax Rate ( τ t ) and c
Pension Expenditure and Social Security Contributions (fractions of output)
Government Debt-Output Ratio
0.27
0.53
0.24
0.48 0.43
0.21
0.38
0.18
0.33
0.15
0.28
0.12
0.23
0.09
0.18
0.06
0.13
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Pension Expenditure (baseline)
Social Security Contributions
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Consumption Tax (baseline)
Debt-Output Ratio
Pension expenditures increase 16 percentage points of output by 2050. The consumption tax rate increases about 32 percentage points.
Health-related public expenditures increase 3.3 percentage points of output by 2050. 25
4. Baseline simulations. 0.33
Aggregate Effective Labor ( N t )
Aggregate Output ( Yt ) 0.23
0.32 0.31
0.22
0.30 0.29
0.21
0.28
0.20
0.27 0.19
0.26 0.25
0.18
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
Output per capita is 18 percent lower (relative to trend) by 2050. Effective labor (per capita) is 20 percent lower by 2050. Output and effective labor remain unscathed through 2025, reflecting capital per capita increases
the rising share of old
sustained effective labor
working households 26
4. Baseline simulations. Aggregate Consumption ( Ct )
Aggregate Capital-Labor Ratio (
0.20
3.2
0.19
3.1
Kt ) Nt
0.18
3.0 0.17
2.9
0.16
2.8
0.15 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
Consumption boom-bust: Boom before 2025, as young generations anticipate consumption. Bust after 2025, consumption per capita is 18 percent lower by 2050. Wage rates increase sharply until 2050, and decline sharply thereafter. Rates of return on capital fall until 2050, and increase thereafter. 27
4. Baseline simulations. Households’ Inter-temporal Substitutions
Labor Effort
0.50 0.45 0.40
to avoid high taxes
0.35
to earn high wages
0.30 0.25
1990 Labor Force Entrant (dashed lines)
0.20 0.15 1 3
5
7
9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Age (years) Initial Steady State
1990 Labor Force Entrant
2010 Labor Force Entrant
Dies at peak of demographic shock Anticipates consumption Delays work effort
Consumption 0.33
2010 Labor Force Entrant (dotted lines)
0.28 0.23
Dies after peak of demographic shock
0.18
Delays consumption
0.13
Delays work effort
0.08 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64
Age (years)
Initial Steady State
1990 Labor Force Entrant
2010 Labor Force Entrant
28
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
29
Historical technological progress -51.5
Welfare
-52.0
0.45 0.40
-52.5 -53.0
0.35
-53.5
0.30
-54.0
0.25
-54.5
0.20
-55.0
0.15
-55.5
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Averaging Period (years) 46 Years of Work Life
0.26
Consumption Tax Rate
Averaging Period (years)
48 Years of Work Life
Annual Pension
0.24
46 Years of Work Life
0.225
48 Years of Work Life
Effective Labor
0.220
0.22 0.20
0.215
0.18
0.210
0.16 0.14
0.205
0.12 0.10
0.200
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Averaging Period (years) 46 Years of Work Life
48 Years of Work Life
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Averaging Period (years) 46 Years of Work Life
48 Years of Work Life
30
5. Pension reform: long-term effects.
Labor Effort
0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 1
4
7
10 13 16 19 22 25 28 31 34 37 40 43 46 Age (years) Baseline (no reform)
Full reform
Partial reform
31
Zero technological progress -55.5
Welfare
0.35
Consumption Tax Rate
0.33
-56.0
0.31 -56.5
0.29
-57.0
0.27 0.25
-57.5
0.23
-58.0
0.21 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46
Averaging Period (years)
Averaging Period (years) 48 Years of Work Life
48 Years of Work Life
0.34
Annual Pension
0.32
0.218
Effective Labor
0.216
0.30
0.214
0.28
0.212
0.26
0.210
0.24
0.208
0.22
0.206
0.20 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Averaging Period (years) 48 Years of Work Life
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Averaging Period (years) 48 Years of Work Life
32
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
33
6. Pension reform: effects in the demographic transition.
Pension reforms
Announced and implemented at the beginning of 2008; unanticipated by households.
Grandfathering clauses
Principle: more grandfathering to households nearing retirement; gradually less grandfathering to households further away from retirement. Fully grandfathered: households that are retired and those that have entered the averaging period (aged 48 years and older). Partially grandfathered: households aged 22-47
Retirement age: Households aged 34-47: increases by 1 year Households aged 22-33: increases by 2 years Averaging period: 2008 through retirement.
Future generations: the retirement age increases 2 years per decade to a maximum of 70 years. Averaging period is the entire work life. 34
6. Pension reform: effects in the demographic transition. Pension Expenditure (fraction of output)
Consumption Tax Rate ( τ tc )
0.27
0.53
0.24
0.48 0.43
0.21
0.38
0.18
0.33
0.15
0.28
0.12
0.23
0.09
0.18
0.06
0.13
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
Full reform
Partial reform
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
Full reform
Partial reform
Increasing the retirement age (partial reform):
Pension expenditures increase 12 percentage points of output by 2050. Contribution of extending the averaging period:
The consumption tax rate increases 25 percentage points. Demographic peak (2050): accounts for a half of the tax rate reduction.
...and extending the averaging period (full reform): Long-term : accounts for a tenth of the tax rate reduction. Pension expenditures increase 8 percentage points of output by 2050. The consumption tax rate increases about 18 percentage points.
35
Increasing the Retirement Age Aggregate Effective Labor ( N t )
0.23
Aggregate Capital ( K t )
0.68
0.22
0.66 0.64
0.21
0.62
0.20
0.60 0.58
0.19
0.56
0.18 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
0.33
0.70
0.54 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
Partial reform
Aggregate Output ( Yt )
0.32
Baseline (no reform)
0.20
Partial reform
Aggregate Consumption ( Ct )
0.19
0.31
0.18
0.30 0.29
0.17
0.28 0.27
0.16
0.26 0.25 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
Partial reform
0.15 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
Partial reform
36
6. Pension reform: effects in the demographic transition.
Increasing the Retirement Age Labor Effort
0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 1
4
7
10 13 16 19 22 25 28 31 34 37 40 43 46 Age (years) Baseline (no reform)
Partial reform
37
6. Pension reform: effects in the demographic transition.
Increasing the Retirement Age Annual Pension ( bT+1 )
0.20 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.10 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Baseline (no reform)
(by 2050)
Output per capita (-14 %) Effective labor per capita (-16 %) Consumption per capita (-14 %)
Effective labor bust-boom Pension benefit reduced (lower skills in averaging period)
Partial reform
Welfare changes
2.5
Macro effects
... but still rising through 2050
2.0
Welfare
1.5
losses:
1.0
labor force entrants 1983-2002
0.5
gains: all other generations
0.0 -0.5 1950
1970
1990
2010
2030
2050
2070
2090
2110
2130
2150
Generation (by year of labor market entry) Baseline (no reform)
Partial reform
38
Extending the averaging period Aggregate Effective Labor ( N t )
0.70
0.23
0.68
0.22
0.66 0.64
0.21
0.62
0.20
0.60
0.19
0.58
0.18
0.56
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Full reform
0.33
Aggregate Capital ( K t )
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160
Partial reform
Full reform
Partial reform
Aggregate Consumption ( Ct )
Aggregate Output ( Yt ) 0.20
0.32 0.31
0.19
0.30 0.29
0.18
0.28 0.17
0.27 0.26 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Full reform
Output (partial reform)
0.16 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Full reform
Partial reform
39
6. Pension reform: effects in the demographic transition.
Extending the averaging period Labor Effort
0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 1
4
7
10 13 16 19 22 25 28 31 34 37 40 43 46 Age (years) Full reform
Partial reform
40
6. Pension reform: effects in the demographic transition.
Extending the averaging period Annual Pension ( bT+1 )
0.19 0.18
Macro effects (by 2050)
0.17 0.16 0.15
Output per capita (-15 %) Effective labor per capita (-18 %)
0.14 0.13 0.12
Consumption per capita (-16 %)
0.11 0.10
Effective labor boom-bust
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Partial reform
Full reform
Pension benefit lower ... and declining before 2050
Welfare changes
3.0
Welfare
2.5 2.0
larger losses: labor force entrants 1983-2002
1.5 1.0
larger gains: all other generations
0.5 0.0 -0.5 1950
1970
1990
2010
2030
2050
2070
2090
2110
2130
2150
Generation (by year of labor market entry) Full reform
Baseline (no reform)
Partial reform
41
Tax smoothing: flat tax rate since 2008 Consumption Tax Rate ( τ t ) (left) and c
Government Debt-Output Ratio (right)
0.30
1.1 0.8
0.28
25.4 24.2
0.26 0.24
23.4
0.22
0.5 0.2 -0.1 -0.4 -0.7
0.20
-1.0
0.18 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Consumption Tax (full reform) Consumption Tax (no reform) Debt-Output Ratio (partial reform)
-1.3
Consumption Tax (partial reform) Debt-Output Ratio (full reform) Debt-Output Ratio (no reform)
42
Effects of tax smoothing—full reform Aggregate Effective Labor ( N t )
0.72
0.23
0.70
0.22
0.68
Aggregate Capital ( K t )
0.66 0.21
0.64 0.62
0.20
0.60
0.19
0.58
0.18 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Tax-as-you-go Tax smoothing 0.33
0.56 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Tas-as-you-go
Aggregate Output ( Yt )
Tax smoothing
Aggregate Consumption ( Ct ) 0.20
0.32 0.31
0.19
0.30 0.29
0.18
0.28 0.27
0.17
0.26 0.25
0.16
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Tas-as-you-go
Tax smoothing
1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Tas-as-you-go
Tax smoothing
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6. Pension reform: effects in the demographic transition.
Effects of tax smoothing—full reform Annual Pension ( bT+1 )
0.17
Macro effects
0.16
(by 2050)
0.15
Output per capita (-12 %)
0.14 0.13
Effective labor per capita (-15 %)
0.12
Consumption per capita (-11 %)
0.11 0.10 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 Tas-as-you-go Tax smoothing 2.5
Effective labor: smoothes the boom-bust
Welfare changes due tax smoothing
No effect on pension benefit
2.0 1.5
Welfare
1.0
larger gains when pension reform is partial
0.5 0.0 -0.5 -1.0 -1.5 1950
1970
1990
2010
2030
2050
2070
2090
2110
2130
2150
Generation (by year of labor market entry) Full reform
No welfare change
Partial reform
44
Outline: 0.
Main results
1.
Model.
2.
Calibration.
3.
Demographic transition.
4.
Baseline simulations.
5.
Pension reform: long-term effects.
6.
Pension reform: effects in the demographic transition.
7.
Summary and conclusions.
45
Conclusions Official and EC projections underestimate the expenditure pressures and adverse macro effects of aging
Main contribution: general equilibrium effects of extending the averaging period when benefits are based on inflation-indexed wage earnings
Particularly powerful at the peak of the demographic shock and under tax-as-you-go policies Increasing the retirement age causes a bust-boom cycle in employment Extending the averaging period causes a boom-bust cycle in employment
Long-term:
Welfare maximizing averaging period is the entire work life with historical technological progress, but shorter with no technological progress
Extensions:
Refine welfare analysis Incorporate heterogeneity within cohorts
46
47
3. Demographic transition
The dependency ratio in Spain is set to increase more sharply than in other large European countries because: life expectancy has increased the most among large European countries, while birth rates have declined more abruptly Demographic Factors: Spain and Europe Life Expectancy Birth Rates Years Change Per thousand Change Spain
78.3
9.1
10.1
-11.6
France Italy Germany
79.2 78.4 78.1
8.9 8.7 8.6
12.5 8.8 8.7
-5.4 -9.3 -8.6
Euro Area
78.3
8.8
10.2
-8.5
Source: Conde Ruiz-Alonso (2004), and World Bank, World Development Indicators 2004 . Note: Information is for 2002, and changes (+/-) are from 1960.
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3. Demographic transition
Spain’s fertility rate has declined more abruptly, but later, than in other large European countries 3.5
Number of Children per woman: Spain and Europe 3.0 Euro Area Italy
France Spain
Germany
2.5
2.0
1.5
19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02
1.0
Source: World Bank, World Development Indicators.
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