Equity versus efficiency in public pension schemes. Microsimulating the trade-off
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http://hdl.handle.net/11250/180355Utgivelsesdato
2007Metadata
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Sammendrag
Abstract:
Any contribution to a pay-as-you-go pension system may be considered mandatory savings to the
extent that it gives a claim to a future benefit. Contributors to the economic literature have argued
that an increase in this savings component will lower implicit marginal tax rates, thereby reducing
distortions in the labour market. However, the efficiency gain created by increasing the actuarial
component of pensions may come at the cost of increased inequality in pension benefits. The tradeoff
between efficiency and equity is not easy to quantify in actual public pension schemes whose
benefit functions intrinsically exhibit non-linear characteristics. This paper develops a framework to
quantify this trade-off in a fully specified pension system using dynamic micro-simulation modelling.
The methodology is then applied to five different pension schemes actually proposed for Norway.
The results demonstrate the relevance of this study: The improvement of the equity-efficiency tradeoff
either does not materialise, as in one case, or is arguably driven by a different factor than
advocated by policymakers.
Keywords: Pension reform, social security, equity, labour supply, and efficiency.