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DISCUSSION PAPER SERIES DPS17 03 FEBRUARY 2017 Towards an equitable and sustainable points system A proposal for pension reform in Belgium Erik SCHOKKAERT Pierre DEVOLDER Jean HINDRIKS Frank VANDENBROUCKE Public Economics Faculty of Business Schokkaert Devoldery Hindriksz Vandenbroucke§ 1 Abstract We describe the that has been proposed by Belgian Commission Pension Reform 2020-2040 Intragenerational equity can be realised a flexible transparent way through allocation within cohort The intergenerational distribution is determined fixing value point newly retired sustainability parameter actual retirees links future pensions to average living standard population employment This implies credible promises Department KU Leuven CORE Université catholique de Louvain yISBA zCORE §University Professor University Amsterdam (UvA) 1The ideas this paper are reflection many stimulating discussions authors thank other members commission (Jos Berghman (+) Jacques Boulet Bea Cantillon Etienne Callatay Philippe De Mol Ria Janvier Alain Jousten Françoise Masai Hans Peeters Gabriel Perl Yves Stevens Guy Van Camp Elly Vandevelde Koen Vleminckx) their valuable input also Pestieau his useful comments made younger contributing generations To keep economically we propose automatic adjustment mechanism which key role played career length implements Musgrave rule stating ratio over labour earnings net contributions should remain constant induces balanced burden demographic economic shocks different cohorts seen as risk sharing Introduction In 2013 government set up so-called “Commission 2020-2040” consisted twelve experts with ideological disciplinary backgrounds (lawyers economists sociologists actuaries) mission was think about broad design investigate full freedom autonomy specific reforms could improve its social medium long term judged it necessary go beyond parametric had characterized policy until final result introduce first (pay-as-you-go) pillar (Commission 2014) will define our interpretation “economic” “social” section 2 presents main principles stylised model Points systems have introduced countries traditional Bismarckian Like Germany “universal” covering all first-pillar Also like 2In France used only complementary There proposals “generalized” (Blanchet et al 2016) but these not yet German built-in Different forms adjustments increases life expectancy OECD (see 2012 overview) These often taken form downward benefits some cases leading problem inadequacy features may interest It integrates explicitly intragenerational effects considers both introduces (conditional) operational criterion between uses (and hence implicitly age retirement) important component Most importantly framed positive new contract rather than cold attempt cut expenditures Its objective formulate promise must unavoidably linked development necessarily conditional on changes retirement behaviour good reasons mix funding pay-as-you-go because portfolio diversification protects better against political risks e g Lindbeck Persson 2003; Devolder Melis 2015; Menil funded second corporate sectoral plans focus Moreover limit ourselves description general structure 3 obvious decisions practical implemented 3In there three separate or “regimes” (private sector workers civil servants self-employed) would applied separately along similar For elements implementation private dependent institutions country (Barr Diamond 2009) More details situation found Report discuss objectives basic described show how makes possible tackle issues (including generations) 4 Section 5 contains conclusion Our present coherent innovative aim build welfare maximisation face provide academic literature where put broader perspective do work out theoretical aspects detail Main motivation growing concern long-run financial most fundamental notion actuarial equilibrium discounted stream time horizon equal same did start from definition 4Automatic balancing mechanisms restore balance recently analysed Godinez-Olivares (2016) requires equality each period concept easier understand closer makers Of course defined realized sharp increase contribution rates possibly negative longer run avoided threaten capacity meet integrate longer-run reflect terminology prefer expression consensus sufficient safeguarding required structural change rebuild stronger foundations outside short-run turmoil deemed explicit rules keeping track fact lagging behind considering such (e take into account increasing expectancy) were already (“putting auto-pilot” 2012) However once one takes immediately clear socially illustrated experience whereby led inadequate (OECD short threatens (often poorest) pensioners But creates provision less interesting young contribute latter politically stable needed (contributing) rely adequate therefore view fair challenge they reconcile “socially sustainable” if pay credibly As see relative absolute) income position acceptance behavioural working Furthermore embodies Pensions insurance They avoid large drop at moment means (to extent) previous contributions) Yet solidarity remains essential 6 sufficiently generous minimum protection people compensated bad luck lives cannot held responsible Typical examples health problems involuntary unemployment Part non-contributory allocated independently individual Since no society exactly since majority opinion matters accommodate 5In theory real assurance scheme operated generation acceptable subsequent unless involves amount redistribution especially true when debt analysis Tabellini 1991) public choice 6We difficult debate relationship “solidarity” “intragenerational equity” Equity refer responsibilitysensitive egalitarianism Solidarity (which mainly European idea) sometimes expressing citizens (also weaker ones) so far reciprocity opportunity closely use two terms interchangeably views additional sense rapidly changing family structures job mobility want organise own according preferences flexibility responsibility From desirable give respect organisation then willing accept consequences choices lower (or higher) indispensable perceived legitimacy Finally require built understandable Transparency hold able follow building-up rights well-informed system: Basic setup People collect throughout Taking year natural unit zit number collected person i during t allocating further discussed total stock 7 T7 written ZiT = XT t=T?Ni (1) Ni convert PiT given riT vTZiT : (2) Individuals (early) decision individual-specific age-conversion rate (vT ) retiring T explain fixed After principle adjusted 8 deviations after expressed Pi(T+1) (1 + gT+1) T+1 (3) coefficient gT+1 ((ST+1 ? ST )=ST growth gross economy mo- 7Throughout symbol indicate 8Our whole referring here wage indexation ment illustrate focusing issues: partial treatment arduous hazardous jobs varying arrangements Allocation mentioned driven considerations On hand ensure too-large retire link level productivity supply view: strengthening lowers market distortions due 9 protect older who very low hit active control disability allocate persons make directly valued Care activities example All basis productive situations well draw boundary extent non-market lead building values Let us starting builds case idea holding 9See (2003) (too) weak quite end poor (De Donder Hindriks 1998) effort simple following core Sit=St (4) Sit denotes St easy interpretation: someone collects comparison Applying eq without nuances imply (more) (higher) always fewer One imposes proportional arguably too harsh and/or differences cap S above rewarded adapting as: min(Sit; itS )=St; (5) it correction part-time 10 Low-income 10Eq hours worked influence (s)he accumulates counts consider legitimate (eventual) accumulated approach yearly disadvantageous variable another below compared life-cycle just solved applying transformation amounts sum cycle more complicated formulas decrease transparency advantages lost recalculated information available 3) protected introducing 11 certainly need means-tested Eq still formula suggest periods non-activity (such sickness unemployment) kind create claim lump relation economy) decided upon reference evaluate noncontributory progressively added function circumstances informed (whether contributory non-contributory) easily addition offers anchor them: know earned gives them 12 equally 11In guaranteed everybody full-time “reference” “normal” 2) corresponding least 110% (means-tested) elderly turn official EU poverty threshold 60% median 12The apply return issue Freedom well-being while financially Flexibility attractiveness postponing switching less-physically demanding possibilities Flexible organised around Some earlier seems unfair force before usually lower-income hazardous) characterised socioeconomic Again correlation later studying longer) Note giving focal process automatically shift recent decades fraction regimes underlying parameters might Persons mixed careers claims participate remove associated (without points): well-defined transformed fully reason trend stop near N regulator 13 subscript indicates 4) Person starts xi0 years When xiT x iT respectively (6) (7) free soon reached xmin !T predetermined window “discounting” smaller individuals normal larger Full neutrality based expected death uncertain Queisser Whitehouse 2006) welfareadjusted (as (3)) disregard discounting effect determine ages appendix 1) factor follows: eT (x (xiT ; (8) (x) remaining x 13Of advance communicated few application averaged males females Eqs (6)-(7) uninterrupted covers freely chosen breaks presented Appendix Such included calculation interpreted actually assimilated Freely late become unrealistically extremely small corrections asymmetric whose higher “legal” legal contrast derived uniform applicable advantage becomes possibility handle per se concerned considerably simplifies administration temporary (re)calculations gradually obtained converted 14 operation multiplying conversion (2)) Partial last one’s option attractive prolong grow deteriorating employer simply part (at conversion) By provided (pseudo-)actuarial age-related factors Without optimal (part of) continue afterwards Arduous An hotly debated those having central (rather age) answer question allows refinement however supplementary allowing access occupied shortcomings First let early 15 find themselves light particularly past affected Thus inequitable solely ineffective postpone switch lighter If determines strong disincentive Second content Technological organisational cause much round) plan Allocating solves (i rights) independent situated adjust noted creating does calculations conditions receiving pseudo-actuarial nutshell compensation 16 offset Defining what turns list negotiation partners Given ultimately normative said favor procedure budgetary strict upper “arduousness” any allotment divided revised regularly budget constraint add “new” removed treated generously Changing inequality couples14 Until now purely individualised argued household composition play Consider couple together Suppose decide partner home activity right (either bear joint relevant probably variation cohabitation (sometimes short-lived) 14Of questions related surviving (2014) series regard specifically introduction 17 sequence relationships solve redistribute (presumably shares necessary) ends again his/her splitting goes complete individualisation alternative striking solution Intergenerational fix Two (complementary) sets matter determination vT raises survive exchange getting (“equitable”) Social trust hand-in-hand setting At sight seem currently unpredictable occur either high 18 meaningful community negative) privileged unacceptable relate obtain Define (hypothetical) reasonable assume ceiling designed receives proportion  TST (9) T replacement Combining taking derive (10) Inserting using yields awarded T: ( )ZiT ): (11) 19 cohortspecific distribution: late) minima maxima Ceteris paribus reactions measured measures leads equiproportional intra- elegant notice mean benefit confronted next guarantee defining various Long-run refers place trust) Therefore obey separation care 20 point) focuses elaborate long-term vision contrary fundamentally prediction) realistic requirement weakened cycles Financing buffer decreasing Denoting size employed AT BT condition PTBT TSTAT (12) PT paid T overall dependency DT (BT =AT PTDT TST (13) =ST T third 15Later split groups: denoted BN BO 21 writing TDT (14) coincide exact concerning though positively correlated calculated data Equations (12)-(14) financing lot cyclical room integrated formal straightforward assuming financed expressions carry include Structural absorbed (an infinite combinations direct yield (the rule) 22 Defined polar D shock ageing population16 affecting shows   equilibrium: dDT dT dT (15) “defined benefit” (DB)- type borne down switched partially) contribution” (DC) 0 move ?dDT Neither DB nor DC-system realise former costs) (mainly poor) look 16Calling “shock” misnomer perhaps called “change” “burden sharing” “risk convenience call “shocks” 23 T expressions: (16) ?T (17)  zero intermediate solutions DC Valeriola 2017) (1986) advocated Myles (2002) Schokkaert Parijs stabilise )ST ; (18) equivalently : (19) LHS eqs (18)-(19) “Musgrave ratio” rule” stabilised captured  justified follows d(1 (20) 24 share express levels crucial definitions arrive results summarised Table table shared systems: S affect proportionally earnings18 consequence appear line With Changes respected whereas unaffected considered 17For notational dropped 18The “net earnings” taxes 19Knell (2009) analyses internal measure equates Simulations multi-period OLG-model sensitive (in sizes) close implied 25 FIXED (P=S) =(1 ) D D=(1 D) P S=D S S=(1 )S D)S S=(1 (1?T (1?) 1?D 4S 4D 1: Risk 26 resources lifecycle pragmatic Indeed under assumptions utility functions consumption old incomplete challenges settle correct Fixing represents stance silent hardly D) exogenous react leisure life-time complemented Third incomes 20As Ball Mankiw (2007) predicted outcome hypothetical markets argue security mimic See Spinnewyn (1989) 27 populations depends transfers arguable adapted impact significant simplicity in-between known (net) fits aims refinements implement nature works sections sharing: existing analyse cope likely adapt adjusting defensible bring types rare interna- 28 tional comparative (2012): Using notation “standard” (with window) formalised (xmin eT?1(xmin T?1): publicly surely reallocation mechanism: T?1 ” T?1) # (21) (22) (starting adult gained 29 scenario intuitive appeal “constant retirement”-scenario simulations Schwann Sail (2013) Börsch-Supan (2015) he rational shown simplified illustration exogenous: employment) whether indeed happens implications (11): her )(ZiT Under satisfied promise: generosity eligibility get (7)) underestimate importance 21In even drastically 30 communication career: told maintained opportunities simplifying judges choose < suffice How done explained Other caused baby-boom fertility Another completely kept applies adaptation 22This assumes reduction lack prefinancing resulting cost discussion Howse 31 mixture enters picture “equilibrium”  (satisfying constraint) ST DT (23) fixes distinction write (37) 3): sNT (rZ)T sOT (rZ)T?1 ?1 (24) riTZiT (averaged T) degree freedom: satisfying Decreasing vice versa divide =N ?1=N (25) 32 basically (if change) assumed (T indexed sketched push lowest itself wants preventing proper Mixed insights calls should) fall partly “compensated” conditional: 33 downwards Remember reflects towards time) sources parts rate): (dDT )LE )OT (26) Only justifies yields: (27) ?T (28) ratio) 34 (who career) Policy levers monitoring satisfy respecting justice highly reality things (18): (29) averages controlled maker law chiseled stone litmus test help steer direction endogenous variables manipulated (leaving aside points) Careful modeling appendices results) includes 35 (PT (DT ); influenced Closely groups While being observable calculable Information regular permanent Conclusion allow boundaries 36 distinguish (a above) mechanical device clearly criteria monitored compass guide notional (NDC)-systems Sweden Italy Poland similarity NDC benefits: duration feature (8)) 23In practice improbable unlikely earnings: sudden linkages moving smoothing order prevent nominal conceivable floor wages subsequently delay coupling neutralized 37 treats pure lesser accrual shorter per-period accounts inherently DC-nature side slow unavoidable deterioration merely deliberately permanently monitored: disposes levers: handled Their depend empirical agents accompanied careful macromodels microsimulation models drastic needs avoided: resort Further 38 cycle: surpluses created cover deficits act generally formally efficiency fine-tune left open transition fulfilled accepted Progress succeeds fostering enough support anticipates evolutions whilst societal ambition happened preparatory stage Appendices Pseudo-actuarial common contribution-systems) aT (30) 1X s=x pT (x; s) g)s?x i)s?x (31) discount (assumed constant) probability somebody alive s 39 assumption long-run) reduces (s; x) (x); structured concepts: (6)) x0 (32) educated Assume gap NiG (33) defines minimal min(x (34) 40 generalised [min(x )] (35) No > bonuses original incentive insufficient lump-sum bonus (potential) relatively low-income earners Replacement N O (36) “old” Assuming loss generality) rewrite sNT(rZ)T sOTdenote 41 Dividing ratio: (38) Additional lost) revalorisation (25)): h (39) group (sNT (labour (reasonably) neglected unambiguously substitution (positive) brackets 42 empirically estimated reasonably ` uniformly distributed b schooling disability) u steady state u; B Now 4` `1?` b1 `1 u1 a1 (40) equivalent text 43 References L G 2007 spirit Arrow Debreu Rawls applications Journal Political Economy 115 4: 523-47 Barr 2009 Reforming pensions: Principles analytical errors directions International Security Review 62 2: 5-29 Blanchet Bozio Rabaté 2016 Quelles options pour réduire la dépendance à croissance du système retraite français? 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