pension reform and welfare 1 dennis j. snower at iseo, 4 july 2005 at iseo, 4 july 2005

Pension Reform and WelfarePension Reform and Welfare 11

Pension Reform and WelfarePension Reform and Welfare

Dennis J. SnowerDennis J. Snower

at ISEO, 4 July 2005at ISEO, 4 July 2005


ContentsContents

Pension IssuesPension Issues

Pension Reform: Comparative PerspectivePension Reform: Comparative Perspective

Labor Market IssuesLabor Market Issues

Macroeconomic Implications of the Macroeconomic Implications of the Unemployment Benefits SystemUnemployment Benefits System

Microeconomic Implications of Labor Microeconomic Implications of Labor Market ReformMarket Reform

Policy ProposalsPolicy Proposals


EU ProblemsEU Problems

Population projects for the EU indicate thatPopulation projects for the EU indicate that– The ratio of persons of working age The ratio of persons of working age (15 to 64) (15 to 64)

to those aged over 65 will decline from 4.1 in to those aged over 65 will decline from 4.1 in 2000 to 2.1 in 2050. 2000 to 2.1 in 2050.

– While the total population is not expected to While the total population is not expected to increase, the elderly population will increase increase, the elderly population will increase from 61 to 103 million. from 61 to 103 million.


PAYG vs Funded SchemesPAYG vs Funded Schemes

In PAYG, payments to current pensioners In PAYG, payments to current pensioners are funded out of the contributions of are funded out of the contributions of working members. working members.

In funded schemes, the pension funds are In funded schemes, the pension funds are invested in assets, and their return invested in assets, and their return provides retirement income.provides retirement income.


The government budget constraint: The government budget constraint: twLtwLNN=pL=pLPP

where where tt =payroll tax, =payroll tax,ww = wage, = wage,

LLNN = number of workers, = number of workers,

p p = pension income per person= pension income per person

LLPP = number of pensioners= number of pensioners

Thus: Thus:

t = t = ((P/WP/W) () (LLPP /L /LNN))where (where (P/WP/W) is the generosity of pensions, and) is the generosity of pensions, and

((LLPP /L /LNN) is the aged dependency ratio.) is the aged dependency ratio.


DB vs DC schemesDB vs DC schemes

A defined benefit scheme pays out a A defined benefit scheme pays out a predetermined amount, predetermined amount, – usually related to number of years of service usually related to number of years of service

and salary in the final years.and salary in the final years.

A defined contribution scheme pays out A defined contribution scheme pays out the return on funds invested on the the return on funds invested on the individual’s behalf. individual’s behalf.


Risks: Risks: – DB schemes are less portable, DB schemes are less portable,

thus favour people who do not switch jobs.thus favour people who do not switch jobs.

– DB schemes favour people with steep DB schemes favour people with steep intertemporal earnings profiles,intertemporal earnings profiles,

who tend to be skilled workers. who tend to be skilled workers.

– The DC pensions depend on the position of The DC pensions depend on the position of the stock and bond markets. the stock and bond markets.


The introduction of a PAYG system is The introduction of a PAYG system is Pareto improving as long as Pareto improving as long as – the growth rate of the populationthe growth rate of the population– plus the growth rate of real wagesplus the growth rate of real wages

is greater than the rate of interest. is greater than the rate of interest.


Efficiency IssuesEfficiency Issues

The value of a pension is affected by the rate of The value of a pension is affected by the rate of inflation.inflation.– Only the government can provide relevant insurance. Only the government can provide relevant insurance. – Solution: Inflation-indexed bonds. Solution: Inflation-indexed bonds.

MyopiaMyopia– Pensions are a merit good. Pensions are a merit good. – Solution: Compulsory pensions. Solution: Compulsory pensions.

Incentives to work and saveIncentives to work and save


Equity IssuesEquity Issues

Pensions related to past or current incomes: Pensions related to past or current incomes: – In a funded system, pensioners’ incomes are related In a funded system, pensioners’ incomes are related

to their past incomes, whereas under PAYG, they to their past incomes, whereas under PAYG, they could be related to current incomes. could be related to current incomes.

The gender gap:The gender gap:– Women earn less than men.Women earn less than men.– Women have fewer years of full-time work.Women have fewer years of full-time work.– Women live longer than men. Women live longer than men.


ContentsContents

Pension IssuesPension IssuesPension Reform: Comparative Pension Reform: Comparative PerspectivePerspectiveLabor Market IssuesLabor Market IssuesMacroeconomic Implications of the Macroeconomic Implications of the Unemployment Benefits SystemUnemployment Benefits SystemMicroeconomic Implications of Labor Microeconomic Implications of Labor Market ReformMarket ReformPolicy ProposalsPolicy Proposals


The US Pension SystemThe US Pension System

Three pillars:Three pillars:– State-financed, PAYG pillarState-financed, PAYG pillar– Funded occupational pensionFunded occupational pension– Funded personal pensionFunded personal pension

Problem: UnderfundingProblem: Underfunding– In the aftermath of the stock market decline of In the aftermath of the stock market decline of

2000-02.2000-02.


Occupational pensions:Occupational pensions:– 45% of employees have voluntary occupation 45% of employees have voluntary occupation

pension. pension. – Two types: DB and DCTwo types: DB and DC

401(k) Plans401(k) Plans– Since the early 1980s. Since the early 1980s. – Cross between occupational and personal pensions. Cross between occupational and personal pensions. – Both employers and employees can contribute. Both employers and employees can contribute. – Employees can choose among plans with different Employees can choose among plans with different

risk-return profiles. risk-return profiles. – Relatively few restrictions on withdrawals (after 60 Relatively few restrictions on withdrawals (after 60

years of age).years of age).


Swedish Pension ReformSwedish Pension Reform

1992/1994: Sweden moved from a traditional income-1992/1994: Sweden moved from a traditional income-related DB system to two types of DC systems:related DB system to two types of DC systems:– 14% of contributions go into individual financial accounts 14% of contributions go into individual financial accounts

und the financial DC sund the financial DC syystem.stem.Managed by a variety of private funds, chosen by the individual. Managed by a variety of private funds, chosen by the individual.

– The remaining 86% go into the new PAYG system.The remaining 86% go into the new PAYG system.– The equivalent of 16% of each individual’s annual The equivalent of 16% of each individual’s annual

pensionable income is credited yearly to his notional pensionable income is credited yearly to his notional account, under the Notional DC System.account, under the Notional DC System.

– Because of the commitments to keep the contribution rate Because of the commitments to keep the contribution rate fixed, the new system will accommodate demographic and fixed, the new system will accommodate demographic and economic developments by adjusting the value of the economic developments by adjusting the value of the pensions. pensions.


UK Pension ReformUK Pension Reform

Four tiers:Four tiers:– State social security benefits for pensioners, State social security benefits for pensioners,

which consist of which consist of a basic flat rate state retirement pension and a basic flat rate state retirement pension and a state earnings related pension scheme (SERPS)a state earnings related pension scheme (SERPS)

– Occupational pension schemes, offered by Occupational pension schemes, offered by employers.employers.

– Pension schemes established by private Pension schemes established by private insurance companies. insurance companies.

– A state minimum guarantee. A state minimum guarantee.


The problem is not so much the cost of the The problem is not so much the cost of the system, but the growth in income system, but the growth in income inequality among pensioners. inequality among pensioners. – Too many people have difficulty adding on to Too many people have difficulty adding on to

their flat-rate basic state old age pension. their flat-rate basic state old age pension. – Occupational and private pensions tend to Occupational and private pensions tend to

benefit the better off most. benefit the better off most.


German Pension ReformGerman Pension Reform

The Riester Reform in 2001The Riester Reform in 2001The PAYG pillar: reducing the replacement rate. The PAYG pillar: reducing the replacement rate. – By 2030 the net income replacement ratio will fall to 67-68%, as By 2030 the net income replacement ratio will fall to 67-68%, as

compared to 70% today. compared to 70% today. – Return to wage-oriented pension adjustment.Return to wage-oriented pension adjustment.– Basic protection for everyone, according to need. Basic protection for everyone, according to need.

Introducing supplementary funded pensions.Introducing supplementary funded pensions.– Voluntary, capital funded provision, promoted by government Voluntary, capital funded provision, promoted by government

subsidies, subsidies, – designed to support those on low income and families with designed to support those on low income and families with

children. children.

State promotion of occupational pension schemes.State promotion of occupational pension schemes.


ContentsContents








European UnemploymentEuropean Unemployment

European unemployment trended upwards between the European unemployment trended upwards between the mid-1970s and mid-1990s. Since then it has varied mid-1970s and mid-1990s. Since then it has varied cyclically, without major structural change. cyclically, without major structural change.

Within Europe, the UK and some small European Within Europe, the UK and some small European countries (Denmark, Ireland, and the Netherlands) have countries (Denmark, Ireland, and the Netherlands) have experienced declines in unemployment, particularly in experienced declines in unemployment, particularly in the 1990s. the 1990s.

By contrast, other continental European countries By contrast, other continental European countries (Germany, France, Italy) have experienced continued (Germany, France, Italy) have experienced continued high unemployment.high unemployment.

Long-term unemployment (more than 1 year): 50% of Long-term unemployment (more than 1 year): 50% of total adult unemployment.total adult unemployment.


Divergent Unemployment RecordsDivergent Unemployment Records

Over the 1990s, the countries that experienced Over the 1990s, the countries that experienced significant drops in unemployment did not significant drops in unemployment did not usually see any increase in inflation.usually see any increase in inflation.– Denmark, Ireland, the Netherlands, and the UKDenmark, Ireland, the Netherlands, and the UK

The countries that reduced unemployment The countries that reduced unemployment significantly tended to have strong growth in significantly tended to have strong growth in employment.employment.– These countries reduced unemployment because they raised These countries reduced unemployment because they raised

employment, not because they found new ways of hiding employment, not because they found new ways of hiding unemployment.unemployment.


EmploymentEmployment

The population groups that suffer from The population groups that suffer from weak employment tend to be those at the weak employment tend to be those at the margins of the workforce. margins of the workforce.

Prime-age men are predominantly employed. Prime-age men are predominantly employed.

By contrast, women, the young and the old have By contrast, women, the young and the old have very different contributions to overall employment very different contributions to overall employment across countries.across countries.

Thus the marginal groups are likely to benefit Thus the marginal groups are likely to benefit disproportionately from employment policies, and disproportionately from employment policies, and these policies should be targeted at them.these policies should be targeted at them.


Non-government employment in the Euro Non-government employment in the Euro area increased by less than 5% between area increased by less than 5% between 1970 and 1998 (in the US the increase 1970 and 1998 (in the US the increase was 70%). was 70%).

The EU employment rate of older workers The EU employment rate of older workers (55-64 years old): less than 40%.(55-64 years old): less than 40%.

The tax burden on labor income: over The tax burden on labor income: over 40%.40%.


55

60

65

70

75

80

60 70 80 90 00

Japan

USA

EU15

Employment Rates


Education and SkillsEducation and Skills

60% of 25-64 year olds had at least upper 60% of 25-64 year olds had at least upper secondary education. secondary education.

But only 8% of this group participate in But only 8% of this group participate in training or ongoing learning.training or ongoing learning.


UK F D IT ES UK F D IT ES UK F D IT ES

Low education Medium education High education

OECD 1996

40 years working life - men

Unemployment

Inactive

Employment

Working life and education


ContentsContents








Macroeconomic Macroeconomic ConsequencesConsequences

Taxes and benefitsTaxes and benefits

Incentives to work and search for jobs

Incentives to work and search for jobs

Rates of employment and non-employment

Rates of employment and non-employment

Tax rate and replacement ratio


The Effect of the Tax Rate on OutputThe Effect of the Tax Rate on Output

Replacement ratio

Tax rate

Job search effort

Work effort

Output and income

Output

Tax rate

Macroeconomic Activity

An increase in the tax rate reduces output and income


Replacement ratio

Tax rate

Job search effort

Work effort

Output and income

Output

Tax rate

Government Budget Constraint

The Effect of Output on the Tax Rate The Effect of Output on the Tax Rate

A reduction in output and income raises the tax rate necessary to finance a given replacement ratio.


Increasing the Replacement Ratio

Replacement ratio

Tax rate

Job search effort

Work effort

Output and income


Tax rate

Macroeconomic Activity (MA)

Output

Government Budget Constraint (GBC)

MA shifts down because higher RR reduces incentives and thus reduces output (given the tax rate).

GBC shifts right because higher RR requires a higher tax rate (for given output).


Response to Adverse Response to Adverse Macroeconomic Macroeconomic

ShocksShocks

Tax rate

Macroeconomic Activity

Output

Government Budget Constraint

The more generous the benefit system, the more destabilizing macroeconomic shocks become, because the tax base is smaller.


ContentsContents








Income Replacement ProgramsIncome Replacement Programs

These programs pay benefits only to those not at work. These programs pay benefits only to those not at work.

Examples:Examples:– Workers’ compensation insurance for work injuries, Workers’ compensation insurance for work injuries, – disability programs, disability programs, – unemployment compensation. unemployment compensation.

For simplicity, consider a program in which For simplicity, consider a program in which – after the adverse shock, workers’ receive their pre-shock after the adverse shock, workers’ receive their pre-shock

income,income,

– once they work, their benefits are withdrawn,once they work, their benefits are withdrawn, – after recovery, the pre-shock income is restored. after recovery, the pre-shock income is restored.


The pre-shock budget The pre-shock budget constraint is constraint is ABAB, and , and earnings are earnings are EE..Maximum utility is achieved at Maximum utility is achieved at

point point DD, where the person , where the person works. works.

The post-shock budget The post-shock budget constraint is constraint is CABCAB. . Maximum utility is achieved at Maximum utility is achieved at

point C, where the person point C, where the person does not work. does not work.

Note that the returns to the first Note that the returns to the first hours of work are negative. hours of work are negative.

The worker is better off at The worker is better off at CC than at than at DD. .

Thus the income Thus the income replacement program replacement program discourages work.discourages work.

Income

Hours of

leisure

A

B

C

D

U1

U2

E

F

Reducing the benefit to AF would ensure no loss of utility through the shock, and still provide an incentive to return to work after the shock.


Guaranteed Annual IncomeGuaranteed Annual Income

The guaranteed annual income is based on family The guaranteed annual income is based on family size, living costs, and local welfare regulations. size, living costs, and local welfare regulations.

Actual earnings are subtracted from this guaranteed Actual earnings are subtracted from this guaranteed level, and the person receives a check for the level, and the person receives a check for the difference. difference.

Example: US welfare programs. Example: US welfare programs.


D

The pre-shock budget The pre-shock budget constraint is constraint is ABAB, and , and earnings are earnings are EE..

The guaranteed annual The guaranteed annual income is income is YYgg..

The post-shock budget The post-shock budget constraint is constraint is ACDBACDB..

If one receives the subsidy, If one receives the subsidy, an extra hour of work an extra hour of work generates no net generates no net increase in income. This increase in income. This is a disincentive to work.is a disincentive to work.

Income

Hours of

leisure

A

B

C

U1

U2

E

F

Yg

At point C the person achieves higher utility than at D.

If Yg were reduced sufficiently, point D would be preferred.


Guaranteed Annual Income with Work Guaranteed Annual Income with Work RequirementRequirement

To tackle the disincentive problem, To tackle the disincentive problem, impose a “work requirement.”impose a “work requirement.”

For example, the government may For example, the government may require recipients to work 3 require recipients to work 3 hours per day to qualify for the hours per day to qualify for the guaranteed annual income. guaranteed annual income.

The post-shock budget constraint The post-shock budget constraint is is AHGDBAHGDB..

The effect of the policy is to induce The effect of the policy is to induce the recipients to work, but as the recipients to work, but as long as they are on welfare, long as they are on welfare, they have the incentive only to they have the incentive only to work the minimum hours work the minimum hours needed to qualify.needed to qualify.

D

Income

Hours of

leisure

B

CE

F

Yg

G

A

H


The Earned Income Tax The Earned Income Tax Credit (EITC)Credit (EITC)

The EITC is an earnings subsidy.The EITC is an earnings subsidy.

Tax credit for low-income families with at least Tax credit for low-income families with at least one worker. one worker.

If their tax credit exceeds their total income tax If their tax credit exceeds their total income tax liability, recipients receive a check for the liability, recipients receive a check for the difference. difference.

The tax credits vary with earnings and the The tax credits vary with earnings and the number of dependent children.number of dependent children.


The EITC is meant to be an income maintenance The EITC is meant to be an income maintenance program that preserves work incentives.program that preserves work incentives.

Many believe that the EITC is the most effective way to Many believe that the EITC is the most effective way to subsidize the working poor. subsidize the working poor. Its benefits are more concentrated on the poor than are the Its benefits are more concentrated on the poor than are the

benefits of the minimum wage. benefits of the minimum wage.

Since the subsidy is issued to workers through the income tax Since the subsidy is issued to workers through the income tax system, it avoids the stigmatizing effects associated with system, it avoids the stigmatizing effects associated with wage subsidies to the employer. wage subsidies to the employer.

It is currently the largest cast subsidy program directed It is currently the largest cast subsidy program directed a low-income households with children.a low-income households with children.


For workers with one child:For workers with one child:– For earnings of For earnings of $6,680$6,680 per year or less, the tax per year or less, the tax

credit is credit is 34%34% of gross earningsof gross earnings, , – up to a maximum of $2,271 (= $6,680 x 0.34).up to a maximum of $2,271 (= $6,680 x 0.34).– For earnings between $6,680 and For earnings between $6,680 and $12,300$12,300, ,

receive the maximum credit. receive the maximum credit. – For earnings above $12,300, the tax credit is For earnings above $12,300, the tax credit is

gradually phased out, so that when earnings gradually phased out, so that when earnings reach reach $26,494$26,494, the tax credit is zero. This means , the tax credit is zero. This means that net earnings are that net earnings are 84%84% of gross earningsof gross earnings..


Let Let WW be the gross wage be the gross wage and and WWnn be the net wage. be the net wage.

Work incentives:Work incentives:The income effect pushes in The income effect pushes in

the direction of less work.the direction of less work.

– Segment Segment ACAC: : WWnn = 1.34 = 1.34

WW; substitution effect ; substitution effect pushes for more work.pushes for more work.

– Segment Segment CDCD: : WWnn = W = W; ;

substitution effect is substitution effect is absent.absent.

– Segment Segment DEDE: : WWnn = 0.84 = 0.84

WW; substitution effect ; substitution effect pushes for less work.pushes for less work.

– SegmentSegment EB EB: : WWnn = W = W

Income

Hours of

leisure

B

A

$6,680

$12,300

$26,494

C

A

D

E


The EvidenceThe Evidence

Modest effects on labor supply (in the US): Modest effects on labor supply (in the US): – Those in the lowest earnings zone increased their Those in the lowest earnings zone increased their

labor supply by 18 hours per year;labor supply by 18 hours per year;– those in the middle and upper zones reduced their those in the middle and upper zones reduced their

labor supply by 35-51 hours per year, respectively.labor supply by 35-51 hours per year, respectively.

The expansion of the EITCThe expansion of the EITC– induced more single mother recipients to join the induced more single mother recipients to join the

labor market, butlabor market, but– slightly reduced labor force participation and hours of slightly reduced labor force participation and hours of

work among married mother recipients.work among married mother recipients.


ContentsContents








Guidelines for Policy DesignGuidelines for Policy Design

Redistribute income primarily through Redistribute income primarily through economic incentives to work and acquire skills. economic incentives to work and acquire skills. – For example, the longer a person is unemployed, the For example, the longer a person is unemployed, the

larger the employment and training incentives he or she larger the employment and training incentives he or she should receive.should receive.

Subsidies rise with the duration of unemployment, and fall the Subsidies rise with the duration of unemployment, and fall the duration of subsequent employment.duration of subsequent employment.

– Training should be customised to the needs of Training should be customised to the needs of employers.employers.

Subsidised work experience. Subsidised work experience.


Proposal 1: VouchersProposal 1: Vouchers

– Employment vouchers.Employment vouchers.– Training vouchers.Training vouchers.


Unemployment duration

PV from employment

PV from unemployment

PV from unemployment: traditional policy

Employment vouchers and job searchEmployment vouchers and job search


Benefits

Costs

Skill, Effort

Income

Training vouchers and skill acquisitionTraining vouchers and skill acquisition


Allow all existing benefits to be Allow all existing benefits to be exchangeable for employment and training exchangeable for employment and training vouchers. vouchers. – The rate at which they are transferred should make The rate at which they are transferred should make

the transfers neutral to the government’s budget.the transfers neutral to the government’s budget.

Further redistribution through a conditional Further redistribution through a conditional negative income tax. negative income tax. – Simplify the tax-transfer system: Replace the plethora Simplify the tax-transfer system: Replace the plethora

of redistributive measures by a scheme based on of redistributive measures by a scheme based on income. income.

Income support for the disadvantaged after Income support for the disadvantaged after interviews and counselling.interviews and counselling.– These are to ensure support for those who are unable These are to ensure support for those who are unable

to work or acquire skills. to work or acquire skills.

Further GuidelinesFurther Guidelines


Proposal 2: Welfare AccountsProposal 2: Welfare Accounts

Retirement accountRetirement account (covering pensions) (covering pensions)

Unemployment account Unemployment account (covering (covering unemployment support)unemployment support)

Human capital account Human capital account (covering (covering education and training)education and training)

Health accountHealth account (covering insurance (covering insurance against sickness and disability)against sickness and disability)


Salient FeaturesSalient Features

Contributions to welfare accounts rather Contributions to welfare accounts rather than taxes. than taxes. Mandatory minimum contribution rates and Mandatory minimum contribution rates and mandatory maximum withdrawal ratesmandatory maximum withdrawal rates..– Rates set in an actuarially fair manner: for Rates set in an actuarially fair manner: for

each account, the discounted value of the each account, the discounted value of the associated aggregate benefits equals the associated aggregate benefits equals the discounted value of the aggregate discounted value of the aggregate contributions. contributions.

– Rates depend primarily on income and age. Rates depend primarily on income and age.


Encourage the Private Sector to Encourage the Private Sector to Contribute to the Welfare SystemContribute to the Welfare SystemThe private sector will contribute only if it is The private sector will contribute only if it is impossible for the government to use the tax-impossible for the government to use the tax-and-transfer system to drive the private and-transfer system to drive the private providers out of business. providers out of business.

Thus the Thus the government must have two budgetary government must have two budgetary systems: systems: – one in which non-welfare expenditures are financed one in which non-welfare expenditures are financed

through the existing array of taxes, and through the existing array of taxes, and – another system in which the public-sector another system in which the public-sector

expenditures on welfare services are financed expenditures on welfare services are financed through payments from people’s welfare accounts.through payments from people’s welfare accounts.


CompetitionCompetition

The public and private sectors would The public and private sectors would provide welfare services on an equal provide welfare services on an equal footing.footing.

To prevent the private sector from To prevent the private sector from “cream-skimming”, private-sector “cream-skimming”, private-sector pricing needs to be regulated:pricing needs to be regulated:– make prices of welfare services dependent make prices of welfare services dependent

only on a small number of characteristics, only on a small number of characteristics, such as age and income.such as age and income.


RedistributionRedistribution

The government can make balanced budget The government can make balanced budget redistributions. redistributions. Redistributing income across people’s accounts along Redistributing income across people’s accounts along the lines of a “conditional negative income tax.” the lines of a “conditional negative income tax.” Conditions attached to the transfers for low-income Conditions attached to the transfers for low-income groups:groups:– Evidence of willingness to work.Evidence of willingness to work.

If account balance falls below zero: If account balance falls below zero: – replenish that account with excess funds from the other replenish that account with excess funds from the other

accounts. accounts. – If all balances fall below zero, the government would make If all balances fall below zero, the government would make

specified deposits.specified deposits.


Voluntary ContributionsVoluntary Contributions

People are encouraged to voluntarily People are encouraged to voluntarily contribute more than the specified contribute more than the specified minimum amounts to their accounts. minimum amounts to their accounts. – While their While their contributions contributions are taxed or are taxed or

subsidised in accordance with the conditional subsidised in accordance with the conditional negative income tax scheme, negative income tax scheme, withdrawals and withdrawals and capital income capital income from their accounts are taxed from their accounts are taxed at preferential rates.at preferential rates.


Employment IncentivesEmployment Incentives

Additional transfers to the welfare Additional transfers to the welfare accounts of long-term unemployed people accounts of long-term unemployed people who purchase “employment voucherswho purchase “employment vouchers:”:”– Recruitment vouchers (also for pensioners)Recruitment vouchers (also for pensioners)– Training vouchersTraining vouchers


The Self-Regulating Welfare StateThe Self-Regulating Welfare State

If people’s balances in a particular account If people’s balances in a particular account exceeded a specified limit, they could be exceeded a specified limit, they could be transferred to other welfare accounts. transferred to other welfare accounts.

Welfare services are financed solely from what Welfare services are financed solely from what people choose to spend on these services out of people choose to spend on these services out of their welfare accounts. their welfare accounts. – Thus the government has no incentive to manipulate Thus the government has no incentive to manipulate

the contribution rates and withdrawal rates of the the contribution rates and withdrawal rates of the welfare accounts in order to ease fiscal pressures welfare accounts in order to ease fiscal pressures outside the welfare state.outside the welfare state.


The UpshotThe Upshot

To increase incentives for productive activity. To increase incentives for productive activity. To reduce waste in welfare provision. To reduce waste in welfare provision. To encourage investment.To encourage investment.To increase consumer choice regarding the magnitude To increase consumer choice regarding the magnitude and composition of welfare services.and composition of welfare services.To make redistribution less wasteful, by promoting To make redistribution less wasteful, by promoting competition between the public and private sectors in the competition between the public and private sectors in the provision and finance of welfare services.provision and finance of welfare services. To induce the private sector to contribute to the provision To induce the private sector to contribute to the provision and finance of welfare services.and finance of welfare services. To be To be self-financing. self-financing.

pension reform and welfare 1 dennis j. snower at iseo, 4 july 2005 at iseo, 4 july 2005

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