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Reforming pensions: principles, analytical errors and policy directions

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  • Barr, Nicholas
  • Diamond, Peter

Abstract

This article, based on two books (Barr and Diamond 2008, forthcoming), sets out a series of principles for pension design rooted in economic theory: pension systems have multiple objectives, analysis should consider the pension system as a whole, analysis should be framed in a second-best context, different systems share risks differently, and systems have different effects by generation and by gender. That discussion is reinforced by identification of a series of widespread analytical errors – errors that appear in World Bank work, but by no means only in World Bank work: tunnel vision, improper use of first-best analysis, improper use of steady-state analysis, incomplete analysis of implicit pension debt, incomplete analysis of the impact of funding (including excessive focus on financial flows, failure to consider how funding is generated, and improper focus on the type of asset in trust funds), and ignoring distributional effects. The second part of the article considers implications for policy: there is no single best pension design; earlier retirement does little or nothing to reduce unemployment; unsustainable pension promises need to be addressed directly; a move from PAYG towards funding in a mandatory system may or may not be welfare improving; and implementation matters – policy design that exceeds a country’s capacity to implement it is bad policy design. We illustrate the ranges of designs of pension systems that fit the fiscal and institutional capacity constraints typical at different levels of economic development. The potential gains from simplicity imply that a country capable of implementing an administratively demanding plan does not necessarily gain from doing so. New Zealand has a simple pension system through choice, not constraint.

Suggested Citation

  • Barr, Nicholas & Diamond, Peter, 2009. "Reforming pensions: principles, analytical errors and policy directions," LSE Research Online Documents on Economics 25099, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:25099
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    File URL: http://eprints.lse.ac.uk/25099/
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    References listed on IDEAS

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    1. 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 164-187, February.
    2. Loewenstein, George & Ubel, Peter A., 2008. "Hedonic adaptation and the role of decision and experience utility in public policy," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1795-1810, August.
    3. Waldo Tapia & Juan Yermo, 2007. "Implications of Behavioural Economics for Mandatory Individual Account Pension Systems," OECD Working Papers on Insurance and Private Pensions 11, OECD Publishing.
    4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
    5. Jonathan Gruber & David A. Wise, 1999. "Introduction to "Social Security and Retirement around the World"," NBER Chapters,in: Social Security and Retirement around the World, pages 1-35 National Bureau of Economic Research, Inc.
    6. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
    7. Dutta, Jayasri & Kapur, Sandeep & Orszag, J. Michael, 2000. "A portfolio approach to the optimal funding of pensions," Economics Letters, Elsevier, vol. 69(2), pages 201-206, November.
    8. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303.
    9. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, July.
    10. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
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    Citations

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    Cited by:

    1. Teresa Ghilarducci, 2016. "Innovations in Protecting the Old: Mostly Social Insurance and Some Assets," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2016-05, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    2. Javier Olivera, 2014. "The effects of a multi-pillar pension reform: The case of Peru," Working Papers 2014-21, Peruvian Economic Association.
    3. Cristina Rosu, 2014. "Ibrd And Its Involvement In Modernising And Improving The Functionality Of Pension Systems," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 20.
    4. S³awomir Czech, 2016. "Choice Overload Paradox And Public Policy Design. The Case Of Swedish Pension System," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(3), pages 559-584, September.
    5. Frank Erp & Niels Vermeer & Daniel Vuuren, 2014. "Non-financial Determinants of Retirement: A Literature Review," De Economist, Springer, vol. 162(2), pages 167-191, June.
    6. Daniel Vuuren, 2014. "Flexible Retirement," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 573-593, July.
    7. Bloom, David E. & Mitgang, Elizabeth & Osher, Benjamin, 2016. "Demography of Global Aging," IZA Discussion Papers 10164, Institute for the Study of Labor (IZA).
    8. repec:eur:ejmsjr:154 is not listed on IDEAS
    9. repec:eee:chieco:v:44:y:2017:i:c:p:16-29 is not listed on IDEAS
    10. Raab, Roman, 2015. "Pension wealth gaps in a system with disintegrated retirement arrangements," MPRA Paper 64762, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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