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Pension Reform through Voluntary Opt-Out: The Czech Case

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Abstract

The importance of long-term public finance sustainability in the context of current financial crisis is still seen as one of the basic factors of economic stability. Demographic development resulting in higher percentage of people in retirement age versus economically active people is one of the main risks. There is a growing pressure on expenditures of age-related systems. For this reason the pension scheme reforms are major issue in advanced countries. While some countries have chosen strictly regulated approach towards pension reform, some have given its citizens a choice whether to stay in the old system, or whether to switch to a new one. Such a decision is very complex and whenever the choice was implemented, many more workers switched to a new system than was expected. In this paper, the authors present a micro-based simulation model for the Czech Republic that allows them to model the individuals’ switching decision using several economic and behavioral factors within an old (PAYG DB) and new (FDC) systems. It allows them to estimate the proportion of people who would opt-out to a funded pillar. The authors´ results indicate that under the assumption of rationality and long run predictability of most parameters, only a small fraction of population would choose the multi-pillar scheme. However, this conclusion holds only under a full rationality. Once the authors relax this assumption, a wide range of switching strategies become viable. Therefore, the expectations that the switch will be popular cannot be based only on economic factors, but must also incorporate behavioral aspects, such as the risk of aversion.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 59 (2009)
Issue (Month): 4 (Oktober)
Pages: 309-333

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Handle: RePEc:fau:fauart:v:59:y:2009:i:4:p:309-333

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Keywords: pension system reform; opt-out; pension fund;

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References

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  1. Vladimír Kreidl, 1998. "Penzijní reforma v ÈR (Pension Reform in the CR)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 48(1), pages 36-54, January.
  2. Vladimír Bezděk, 2001. "On one of possible scripts of pension system reform in the Czech Republic (polemic)," Politická ekonomie, University of Economics, Prague, vol. 2001(2).
  3. Ondøej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 292-308, Oktober.
  4. Holzmann, Robert & Palacios, Robert & Zviniene, Asta, 2004. "Implicit pension debt: issues, measurement and scope in international perspective," Social Protection Discussion Papers 30153, The World Bank.
  5. Michal Ježek, 2003. "A Microanalysis of Pension Reform: To Switch or Not to Switch in the Czech Republic?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(11-12), pages 510-538, December.
  6. Alan L. Gustman & Thomas L. Steinmeier, 1995. "Privatizing Social Security: First Round Effects of a Generic, VoluntaryPrivatized U.S. Social Security System," NBER Working Papers 5362, National Bureau of Economic Research, Inc.
  7. Palacios, Robert & Whitehouse, Edward, 1998. "The role of choice in the transition to a funded pension system," Social Protection Discussion Papers 20109, The World Bank.
  8. Libor Dušek & Juraj Kopecsni, 2008. "Policy Risk in Action: Pension Reforms and Social Security Wealth in Hungary, Czech Republic, and Slovakia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 329-357, Oktober.
  9. Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers W99/18, Institute for Fiscal Studies.
  10. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  11. Agar Brugiavini & Richard Disney, 1995. "The choice of private pension plans under uncertainty," IFS Working Papers W95/05, Institute for Fiscal Studies.
  12. R Disney & C Emmerson & M Wakefield, 2001. "Pension reform and saving in Britain," Oxford Review of Economic Policy, Oxford University Press, vol. 17(1), pages 70-94, Spring.
  13. Jan Kubalčík & Radek Zbořil, 2000. "On one of possible scripts of pension system reform in the Czech Republic," Politická ekonomie, University of Economics, Prague, vol. 2000(4).
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Cited by:
  1. Ondřej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," Working Papers IES 2009/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2009.

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