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Incentive Effects of Retirement Income Transfers

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  • Piggot, John
  • Robalino, David
  • Jimenez-Martin, Sergi

Abstract

The paper explores the incentive effects of retirement income transfers – essentially, non-contributory cash transfers aimed at reducing poverty among the elderly. A literature review reveals how little academic analysis of the impact of these transfers has been completed. We begin with a taxonomy of retirement income transfers, differentiating between ex-ante and ex-post interventions and universal and targeted arrangements. This distinction allows important differences across designs to be highlighted. We then provide a simple framework for thinking about what the incentive impacts of the transfers might be, distinguishing between effects related to the transfer itself and those related to the financing mechanism. Thus, from theory and available empirical evidence we derive a few policy relevant findings. First, incentive effects will depend on the level of the transfer relative to average earnings and the degree of integration between the formal and informal sectors in the economy. In general, for modest transfers, negative impacts on savings and labor supply would be contained. Second, we highlight the tradeoff between maintaining low effective marginal tax rates (EMTRs) to reduce distortions and keeping the program costs at affordable levels. This tradeoff suggests that universal programs are suboptimal. Third, in terms of design features, we emphasize the importance of implementing a gradual withdrawal of the benefit to avoid crowding-out contributory pensions among low income individuals and of indexing the eligibility age with life expectancy to contain costs. Finally we find that matching contributions can be a promising instrument to promote savings among individuals with limited savings capacity.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12020.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:12020

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Related research

Keywords: Social pensions; Pension coverage; Retirement Insurance; matching contributions;

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References

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  1. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
  2. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  3. Whitehouse, Edward, 2009. "Pensions at a glance: Asia/Pacific," MPRA Paper 36134, University Library of Munich, Germany.
  4. Bosch, Mariano & Maloney, William F., 2010. "Comparative analysis of labor market dynamics using Markov processes: An application to informality," Labour Economics, Elsevier, vol. 17(4), pages 621-631, August.
  5. Andrew A. Samwick, 1998. "New Evidence on Pensions, Social Security, and the Timing of Retirement," NBER Working Papers 6534, National Bureau of Economic Research, Inc.
  6. Sveinbjörn Blöndal & Stefano Scarpetta, 1999. "The Retirement Decision in OECD Countries," OECD Economics Department Working Papers 202, OECD Publishing.
  7. Michele Boldrin & Sergi Jimenez-Martni & Franco Peracchi, 1997. "Social Security and Retirement in Spain," NBER Working Papers 6136, National Bureau of Economic Research, Inc.
  8. Willmore, Larry, 2007. "Universal Pensions for Developing Countries," World Development, Elsevier, vol. 35(1), pages 24-51, January.
  9. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  10. de Carvalho Filho, Irineu Evangelista, 2008. "Old-age benefits and retirement decisions of rural elderly in Brazil," Journal of Development Economics, Elsevier, vol. 86(1), pages 129-146, April.
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Cited by:
  1. Robalino, David A. & Vodopivec, Milan & Bodor, András, 2009. "Savings for Unemployment in Good or Bad Times: Options for Developing Countries," IZA Discussion Papers 4516, Institute for the Study of Labor (IZA).
  2. Clement Joubert, 2011. "Pension design with a large informal labor market: evidence from Chile," 2011 Meeting Papers 1136, Society for Economic Dynamics.
  3. Vandeninden, Frieda, 2012. "A Simulation of Social Pensions in Europe," MERIT Working Papers 008, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  4. Clement Joubert, 2010. "Dynamic labor supply and saving incentives in privatized pension systems: evidence from Chile," 2010 Meeting Papers 291, Society for Economic Dynamics.

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