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Elisa Baroni
a.c. 2005-
2005-2006
NUI Galway
Supervisor:: Dr. Cathal O¶ Donoghue
Supervisor
 |
ë B.A. Philosophy (1996), M.A. International
Relations (1997), MSc Economics (2003)
from LSE.
ë Worked in international development
before joining UK Dept. Work and
Pensions in 2004.
ë Since 2004, Micro
Micro--simulation Modelling of
Tax/Benefit systems (PSM, BRAHAMS
LIAM) and labour supply (LSM).
ë Currently at IFS
IFS,, Stockholm. Developing
new micro-
micro-simulation model for Sweden
(IFSIM).
  


‰The world Population is growing

older«

«Will the old grow poorer ?´

 
 


ë Theoretical:
‡ To identify economic criteria for evaluating
pension systems and pension reform, in the
context of population aging
ë Empirical:
‡ To quantify the effects of demography +
pension systems + pension reforms on future
poverty + inequality,
inequality, for aging countries
(Ireland, Sweden)
‡ To develop micro
micro--simulation tool for theory
validation and policy making
 |
ë Population Aging = lower mortality + lower
fertility + higher life expectancy
ë By 2050, in EU:

proportion of +65 projected to double

average projected increase in dependency ratios (Old /
Young, Pensioners / Workers) from 24% to 49%
average projected increase in retirement years
average projected increase in pension expenditure by 3-
3-
5%

ë Aging implies more pressure for redistribution

from shrinking active population to growing
inactive population
! |

Higher pension / health care costs ?

Higher taxes ? Lower Savings ? Lower
Private Transfers ?
Lower Output Growth ?
Higher pensioner poverty ?
Higher inequality ?
 !" 
ë Pension System =

1. Public +
2. Occupational +
3. Private
 | !"

Pension Systems redistribute resources for:

1. Insurance / Income Security /

Consumption Smoothing (all pillars)
2. Poverty Reduction (first pillar)
3. Inequality Reduction (first pillar)

Aging can undermine the performance of a

pension system relative to its aims
 | 
ë Future will depend on complex interactions
between Demography + Labour +
Pension System.
System.
Aging can affect sustainability / efficiency /
equity of a Pension System
Pension System can also induce behavioural
changes e.g. increased retirement age which
can counterbalance demographic effects
ë Economic consequences of Aging and
Pension System need to be analysed
together net effects.
ë What pension system is better to address
consequences of aging ?
 !   
!"   
ë Efficiency: impact of system on aggregate
Efficiency:
savings / labour supply / growth
ë Equity:: impact of system on income
Equity
distribution, e.g. between generations
ë Financial Stability: impact of system on
public finances
ë Political Sustainability: is the system going
to be supported by future generations ?
 | |#
ë Balanced DB Public PAYG: c (WL)1 = (NP)2

ë Aging + PAYG «..

affects system balance: c up or P down (unless

W up)
can harm growth if raising c, discouraging
savings and work, or raising national debt.
can increase old age poverty if lowering P
can redistribute unfairly between generations if
they have no actuarial link
can be politically unsustainable
 u
  $
ë Parametric Reforms:
Reforms:
‡ Changes to retirement age, replacement
ratio, contribution rate, indexing, or
taxation of pensions
ë Systemic Reforms:
Reforms:
‡ Changes to system structure or
financing of the system
ë Moving to Funding
ë Making benefit more actuarial (DC)
 !"  %&
 "'
ë Making PAYG term actuarial (DC)
P1 = (1 + G)*c (W)1
lower effective tax less distortion
lower pension costs. But«
‡ more risk on individual
ë Moving to Funded system
NP = (1+R) no tax, no distortion, more
savings + growth. But«
‡ cost of pension for transitional generations
must be paid by new tax.
‡ annuities prices will be affected by aging
&
|(!)| 

&
|(
  
3 Pillars approach to Pension Reform:
Reform:
ë 1st: Public PAYG: to cover only minimum
income / poverty. Mandatory
ë 2nd: Occupational Funded: to provide
income replacement and insurance.
Mandatory
ë 3rd: Personal Funded: to provide extra
insurance. Voluntary
 |&**
|* 
ë Currently, Ireland is young: lowest
proportion of +65 in EU, at 11.1%.
But«
ë Proportion of +65 projected to be
28% by 2056.
ë Dependency ratio (L /P) will decrease
from 5 down to 2 working age people
per pensioner by 2050.
ë Pension Bill projected to increase
from 4.6% to over 9% of GNP by
2050
  +
 "* 
ë Currently, highest poverty risk for Irish pensioners
(women) in EU ! 48% below poverty line
ë State pension (RP or OAP) main source of income for
pensioners
ë Flat benefit, contributory or means tested, ca 32% of gross
average industrial earnings, not indexed.
ë Occupational Pension Membership low - 50% of workers
ë Personal Pension Saving lowest ± 3 % of workers
ë Average Replacement Rate:
Rate: 50% for couple, 43% for single
pensioner.
ë Given low OAP/RP replacement rate, more pensioners need
to access supplementary pensions to reach target RR,
unless public pensions are reformed.
   *  

ë Objectives::
Objectives
1. Ensuring Adequacy of Pensions:
1. RR at 50% of pre-
pre-retirement income
2. COAP / CRP at 34% of average industrial
wage
2. Increasing supplementary pension
Coverage to 70% by 2013
3. Addressing Financial Sustainability
   
ë Pre-Funding
Pre-
ë Ease of access to PRSA
ë Indexation rate of Pensions
ë PRSI Credits for periods spent in
child care, unemployment etc.
Future Poverty and Redistributive
impact ?
 !   
ë Parametric Reforms:
‡ Increasing / Indexing State pensions
‡ Introducing an earnings related State pension
‡ Raising Retirement Age
‡ Tax incentives for supplementary pensions
‡ Indexing pensions to life expectancy
ë Systemic Reforms:
‡ Move to mandatory funded system
‡ Apply Pension system from a different country

Dynamic Micro-
Micro-simulation model to quantify
effects of existing + suggested reforms and
compare
 *  
!  *
ë Part I
1. The Challenges of Aging for Pension Systems and Pension
Reform: an Overview ¥
2. The Economics of Pension Systems and Pension Reform
1. Types of Pension Systems o
2. Types of Pension Reforms o
3. Theoretical Models: OLG o
4. Empirical Models: Micro-
Micro-simulation, (LIAM), Agent Based
Models o
ë Part II
1. Aging and Poverty in Ireland ¥
2. Simulating The Irish Pension System. ¥
1. The Irish Pension System - Overview
2. The LIAM model for Ireland
3. Estimations/Validation
3. Baseline Study: Simulating the long term effects of the Irish
Pension System: Baseline assumptions and results using
LIAM
4. Reform Study: Simulating Irish Pension Reforms: Results
under hypothetical reforms / assumptions, and comparisons
with baseline.
 *  
!  **
ë Part III
1. Pension Systems and Incentives: behavioural effects
on retirement ¥
1. Estimating a Retirement Model in LIAM
2. Simulating the long term effects of the Irish Pension
System on Retirement: Comparing the Irish baseline /
reform scenarios using the retirement module
ë Part IV
1. Comparative Pension Systems Analysis using LIAM:
Results from Sweden and Ireland. Separating the
effect of different institutional, demographic and
labour market characteristics on poverty risks.
ë Part V
1. Conclusions:
1. Micro-simulation as a tool for disentangling the effects of
Micro-
pension design, demographics, behaviours.
2. what can we learn from micro-
micro-simulation of pension
systems which we could not foresee from economic
theory ?
  
 
1. Using LIAM dynamic micro-
micro-simulation model to
produce distributional analysis up to 2050
under actual and simulated pension reforms in
Ireland..
Ireland
2. Building a new retirement module in LIAM, to
include behavioral effects ( = retirement
decision) of pension reforms.
3. Producing an alternative set of analysis using
the new retirement model in LIAM, comparing
to previous outputs.
4. Adapting LIAM to Swedish data and producing a
comparative analysis between the Irish and
Swedish pension systems.
ë Finalizing a paper on the redistributive effects
of corruption using cross-
cross-country data.