IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

A Theory of Noncontributory Pension Design

  • Salvador Valdés

    ()

    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Noncontributory subsidies for the old poor (first-pillar pensions) affect the welfare of hundreds of millions around the world. Their benevolent rationale is to redistribute progressively, subject to efficiency considerations. This paper focuses on a critical efficiency issue: first pillars may affect another, even bigger program, namely contributory pensions for the middle classes, by inducing a reduction in the density of contributions. A major source of concern with contributory pensions in emerging economies is that the total replacement rate is too small for participants with low density, which are prevalent. The paper develops a model where density of contribution is endogenous, because for a substantial subset of jobs, the State is unable or unwilling to impose a mandate to contribute. Thus, the job selection decision is bundled with a saving decision. The first finding is that bundling modifies the effective rate of return on contributions, raising it without bound as earnings in uncovered jobs become smaller (relative to earnings in covered jobs). Another finding is that the standard designs of first-pillar pensions reduce the equilibrium density of contributions. Thus, standard first-pillar designs do crowd out contributory pensions for the middle classes. The paper then analyzes two second-generation designs. The “proportional” minimum pension is found to create horizontal inequity and inefficiency. In contrast, a subsidy with a small withdrawal rate applied to contributory pensions minimizes the loss of contribution density. Optimal income taxation theory suggests that the latter also provides the most efficient progressive redistribution.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.economia.puc.cl/docs/dt_335.pdf
Download Restriction: no

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 335.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:ioe:doctra:335
Contact details of provider: Postal: Avda. Vicuña Mackenna 4860, Macul, Santiago
Phone: (562) 354-4303
Fax: (562) 553-1664
Web page: http://www.economia.puc.cl
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Salvador Valdés-Prieto, 2009. "The 2008 Chilean Reform to First-Pillar Pensions," CESifo Working Paper Series 2520, CESifo Group Munich.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ioe:doctra:335. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jaime Casassus)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.