Abstract
We analyze and compare the long-run effects for a country introducing a capital-funded pension pillar in two scenarios: The case of separate capital markets, on the one hand, and the case of integrated capital markets (a capital market union), on the other hand. Our analysis is based on simulations with a large-scale overlapping-generations model. We find that, in the long run, the introduction of capital-funded pensions is more attractive in integrated capital markets than in separated capital markets, if other countries in the integrated capital market have pay-as-you-go pension systems.
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Notes
- 1.
See OECD (2018) for detailed information on the composition of the pension system across EU and OECD countries.
- 2.
Education decisions are assumed to be exogenous.
- 3.
In the implementation, households also differ in the speed at which they go through the stages of the life cycle, which reflects differences in appetite for effort, luck or other unobserved attributes, a generalization of Gertler (1999) used in Jaag et al. (2010). For ease of presentation, we ignore this model feature.
- 4.
Interaction between the household problems of different skill groups only occurs through prices and general equilibrium effects, and differences in the household problems only arise from differences in parametrization.
- 5.
All disutility functions φj(∙) are assumed to be increasing and convex.
- 6.
The full model also incorporates non-participation due to disability and income from disability benefits.
- 7.
See Keuschnigg et al. (2015) for details on both the pay-as-you-go and the capital-funded pension pillars.
- 8.
The production function is specified as a nested CES-function, following Jaag (2009).
- 9.
The modelling of the labor market is based on a static search-and-matching framework as in Boone and Bovenberg (2002). We assume that there are separate labor markets for each age and skill group.
- 10.
Labor income taxes and social security contributions also apply to unemployment benefits and pension payments.
- 11.
In our simulations, the deficit is covered by a reduction in lump-sum transfers to households.
- 12.
We consider the effects 100Â years after the reform because it takes considerable time for the capital-funded pension pillar to grow to its final steady-state level.
- 13.
Note that, in all tables in this section, changes in output, production inputs, income, consumption and pension payments are reported as deviations from the aggregate growth trend.
- 14.
See the discussion on the parametrization of the pension reform in the previous section.
- 15.
This is in particular the case when non-participation due to disability is taken into account, as it is in our full model.
- 16.
It is important to keep in mind that the welfare gains for the country introducing the capital-funded pensions brought about by the capital market union hinge on the fact that the other country in the union remains with its original pay-as-you-go system. If both countries introduced capital-funded pensions in the same fashion, outcomes in the closed economy and in the capital market union would be identical.
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Davoine, T., Forstner, S. (2019). Welfare Gains from a Capital Market Union with Capital-Funded Pensions. In: da Costa Cabral, N., Cunha Rodrigues, N. (eds) The Future of Pension Plans in the EU Internal Market. Financial and Monetary Policy Studies, vol 48. Springer, Cham. https://doi.org/10.1007/978-3-030-29497-7_9
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