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Pension reform in an OLG model with heterogeneous abilities

Tim Buyse (UGent) , Freddy Heylen (UGent) and Renaat Van de Kerckhove (UGent)
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Abstract
We study the effects of pension reform on hours worked, human capital, income and welfare in an open economy populated by four overlapping generations: three active generations (the young, the middle aged and the older) and one generation of retired. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Our simulation results prefer a pay-as-you-go pension system with a particular earnings-related linkage above a fully-funded private system. This pay-as-you-go system conditions pension benefits on past individual labor income, with a high weight on labor income earned when older and a low weight on labor income earned when young. Uncorrected, however, such a system implies welfare losses for current low-ability generations and rising inequality. Complementing or replacing it by basic and/or minimum pension components is negative for aggregate employment and welfare. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate. An additional correction improving the welfare of low-ability individuals would be to maintain for these individuals equal weights on past labor income.
Keywords
retirement, employment by age, pension reform, overlapping generations, heterogeneous abilities

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Citation

Please use this url to cite or link to this publication:

MLA
Buyse, Tim, Freddy Heylen, and Renaat Van de Kerckhove. “Pension Reform in an OLG Model with Heterogeneous Abilities.” JOURNAL OF PENSION ECONOMICS & FINANCE 16.2 (2017): 144–172. Print.
APA
Buyse, Tim, Heylen, F., & Van de Kerckhove, R. (2017). Pension reform in an OLG model with heterogeneous abilities. JOURNAL OF PENSION ECONOMICS & FINANCE, 16(2), 144–172.
Chicago author-date
Buyse, Tim, Freddy Heylen, and Renaat Van de Kerckhove. 2017. “Pension Reform in an OLG Model with Heterogeneous Abilities.” Journal of Pension Economics & Finance 16 (2): 144–172.
Chicago author-date (all authors)
Buyse, Tim, Freddy Heylen, and Renaat Van de Kerckhove. 2017. “Pension Reform in an OLG Model with Heterogeneous Abilities.” Journal of Pension Economics & Finance 16 (2): 144–172.
Vancouver
1.
Buyse T, Heylen F, Van de Kerckhove R. Pension reform in an OLG model with heterogeneous abilities. JOURNAL OF PENSION ECONOMICS & FINANCE. 2017;16(2):144–72.
IEEE
[1]
T. Buyse, F. Heylen, and R. Van de Kerckhove, “Pension reform in an OLG model with heterogeneous abilities,” JOURNAL OF PENSION ECONOMICS & FINANCE, vol. 16, no. 2, pp. 144–172, 2017.
@article{6914822,
  abstract     = {We study the effects of pension reform on hours worked, human capital, income and welfare in an open economy populated by four overlapping generations: three active generations (the young, the middle aged and the older) and one generation of retired. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Our simulation results prefer a pay-as-you-go pension system with a particular earnings-related linkage above a fully-funded private system. This pay-as-you-go system conditions pension benefits on past individual labor income, with a high weight on labor income earned when older and a low weight on labor income earned when young. Uncorrected, however, such a system implies welfare losses for current low-ability generations and rising inequality. Complementing or replacing it by basic and/or minimum pension components is negative for aggregate employment and welfare. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate. An additional correction improving the welfare of low-ability individuals would be to maintain for these individuals equal weights on past labor income.},
  author       = {Buyse, Tim and Heylen, Freddy and Van de Kerckhove, Renaat},
  issn         = {1474-7472},
  journal      = {JOURNAL OF PENSION ECONOMICS & FINANCE},
  keywords     = {retirement,employment by age,pension reform,overlapping generations,heterogeneous abilities},
  language     = {eng},
  number       = {2},
  pages        = {144--172},
  title        = {Pension reform in an OLG model with heterogeneous abilities},
  url          = {http://dx.doi.org/10.1017/S1474747215000281},
  volume       = {16},
  year         = {2017},
}

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