Resumen de El papel del gobierno en los mercados de planes de pensiones
Ishay Wolf
1. Introduction and Motivation During the late 19th century, the state took on a significant role in protecting those who have or had difficulties providing for themselves and their families. Nowadays, national economies are characterized by a variety of public welfare programs and private welfare mechanisms. These measures come into realization during old age by maintaining some standard of living for the elderly during their retirement phase.
In recent years, pension arrangements have moved to the top of policymakers’ agenda. The current period of pension reforms is driven mainly by growing concern surrounding the economic impact of ageing and a requirement for fiscal restraint, leading to more privatized, partially funded, more delayed, and less sufficient income support in old age (Bonenkamp et al. 2017). Particular attention is devoted to the question of how arrangements can be made to deal with the ongoing ageing of the population and the costs associated with them (for e.g. William, 2019; Arza, 2008; World Bank, 1994).
Countries with relatively high levels of public spending may hope for some relief from the demographic strain on their welfare systems through a decreasing share of beneficiaries at this end (Orenstein, 2013). Therefore, many countries have started to shift away from unfunded to funded pension arrangements. The consequence is that the extent to which individual risks can be shared is becoming more limited (Kourtonas & Yew, 2017).
We have witnessed a dual paradigm shift to privatization and marketization in pension policy, which demands reconsideration after the crash of the financial market in the last decade. As part of the “new politics” of reform, the state has increasingly retreated from its responsibility to maintain income in old age (Ebbinghaus, 2019; Myles & Pierson, 2001) and left private funded pensions to the “drift” of private actors (Hacker 2005; Bohn, 2010). However, following the financial crisis, there seems to be an increasing need and mounting political pressure for the state to reverse reforms and to secure adequate level of pensions in the future. Over the last decade, it was observed that governments around the world are considering increasing their share in response to fluctuations in the market and providing solutions for social affairs, such as income inequality and poverty in old age (Grech, 2018). Financial crisis, including the recent COVID-19 pandemic, has intensified this trend (Gerard et al. 2020). Drawing a cyclical process, the conservative trend evolved in the 1980s and the 1990s, with the state shifting responsibility for old age income being under examination.
The challenge is to improve pension coverage and ensure adequate benefits, although the way to achieve this target is still under continuous debate. From one side, demographic challenges fiscally threaten the western world’s conservative pension design and social security (Feldstein, 2005). From the other side, the privatization and capitalization highly expose the individual to a variety of risks and may aggravate poverty and income inequality in old age.
Due to the latest pension reforms of the 1990s, the future benefit levels and their risk exposures to the market fluctuations have not been truly analyzed. Many research papers such as Ortiz et al. (2018), Hard et al. (2018), Gustman and Steinmeier (2013), and Barr and Diamond (2009) warn about the low expected replacement levels of the benefits of capitalized privatized plans. According to the UNDESA, in 2015, one in eight people worldwide was aged 60 years or above. A major concern today is that the elderly population is not adequately secured through the manifold pension systems that are in place. Moreover, the current working force in the western world faces an increased risk from under-protection and poverty (Ortiz et al. 2018; Hauser, 2008). Results of recent reforms might limit the redistributive focus of social security towards the income of the poor. The individualization of risks may restrict a broader share of elderly to the bottom end of the income distribution (Carone et al. 2016). Although considerable literature has emerged with respect to the preferred pension scheme, not many papers have been written from the risk perspective, taking into account the future consequences of preserving or reforming pension designs, both for the public and the government.
For a major part of the time spent writing this thesis and studying the government’s role in the pension market, unfortunately, the COVID-19 pandemic crisis struck terror globally. The virus has not only cost the lives of more than 2.5 million victims worldwide but has also tragically affected the economic world around us. Governments are thus trying to fight the virus with parallel plans for bailouts and social transfers. Never has there been a realization of systemic risks globally affecting the labor market and financial markets such as now, during the current crisis.
Studying that the challenge of pension design got a surprising turn-around in these days of the pandemic, one has to wonder: What is the state role in the pension market these days? Shall the government intervene in this market like in does in other markets? Is this question relevant only to retirees or those who about to retire in the near future? Is there a perfect pension design that may handle the above-mentioned challenges and minimize risks? What is the priority of risk to manage, risks for the individual, or fiscal risk to the government? These questions are in the back of the mind of every economist dealing with pension designs, especially in these days where the market is unstable. With the decoration of the crisis and the evolving contradicting challenges, this dissertation attempts to throw light on these issues, examining them from the risk perspective.
While it is well recognized that each state has its different socio-economic challenges and, therefore, different pension designs, naturally, it does not decrease the motivation to match different pension schemes to socio-economic situations and try to find the way to optimize pension design. Many scholars map common features in groups of states (Fultz & Hirose, 2019; Natali, 2018; Altiparmakov, 2018; Mesa-Lago, 2018). From there, the path is short to analyze which steps were implemented well and which were taken in the wrong direction. The unstable pension landscape since the 2008 financial crisis and the uncertainty these days have boosted the motivation to find strategic paths to alleviate some of the risks. This may include considerable financial, labor, information, and fiscal risks, both for the government and the public.
2. Contenido de la investigación 2.1. Aims and Novelty The aim of this dissertation is to improve the understanding of the government’s role in the pension market, specifically in this era of shifting from traditional pension schemes to funded-capitalized designs. The derivative scope of this work lies in revealing the government’s crucial importance in assuring adequate and sustainable pension benefits, which alleviate old-age poverty and income inequalities. The work demonstrates the significance of implementing risk-sharing mechanisms alongside the pension pillars, between the individual the government and among successive generations, in order to achieve a sustainable pension design and grant adequate benefits to retirees. Drawing on last three decades of cyclical pension reforms around the globe and the unstable pension landscape, this thesis aims at researching sustainable pension designs that balance fiscal constraints and aging stress with the need to provide adequate pension benefits. With this, the dissertation aims to contribute to the scientific debate on the proper modern pension design in an aging world.
Across the different chapters of this thesis, we assume that the government is a separate actor in the pension market, who operates on behalf of the public to optimize their welfare. Consequently, the thesis is directed to improve the pension designs in the western world from the eyes of both the participant and the government, considering fiscal stability. Moreover, the work aims to elaborate recommendations for policy makers, based on the analysis and research of pension reforms from the risk perspective.
Continuing the new debate on pension design, this thesis recommends focusing not only on one target, such as fiscal sustainability, but to take into considerations income security while tailoring pensions to the needs of heterogeneous consumers. The terminology of risk perspective introduced here changes the phrase of success/failure of pension design in fulfilling one target or another in order to increase/reduce the odds for pension reform instead.
The novelty of this dissertation comes from an expression by its financial perspective to pension reforms, including analytical and empirical analyses. This unique perspective enables new works of research that are included in this thesis, studying the shift to funded pension designs and the significant role of the government a mediator and as a player in the pension market.
• Suggesting bi-path ways of risks between the government and the individual in an equilibrium of pension design; • Providing an analytical explanation for pension evolution across Europe in the last three decades; • Revealing social-economic anomalies by shifting to funded scheme by two different research works, one involving the utility function and the Over-Lapping Generation model and the other involving exchange options; • Conducting empirical research by studying the future benefits of a funded pension scheme with minimum government intervention.
When detailing the interests of variety of actors, avoiding relating to the public as one single actor, economic theories from the 1990s seems less relevant and even erroneous in cases of pension designs, especially during financial crises.
Analytically, by synthesizing financial and economic points of view, this work suggests an equilibrium of risk sharing between agents in the pension market. We claim that deviation from that equilibrium might lead to a cyclical pension reform.
The thesis addresses the following research areas: 1) The preliminary research question starts by mapping the different actors in the pension market. Here, the thesis asks whether the public is one single actor or if it represents different actors with a variety of interests.
2) The thesis inquires if there are inherent repetitive anomalies or difficulties in the funded scheme that may explain some of the recent pension reversals. Here, the thesis contributes to the vast literature on pension reforms, amassed over the last decades, attributing the risk dimension.
3) After analyzing the players, the relations among them, and the different interests revealed by anomalies, we turn to explore how the pension system can be stabilized. We look into the ways in which the government can balance the pension market both fiscally and by ensuring adequate pension benefits, alleviating the risk of poverty in old age.
4) Studying the interplay in the pension system from the risk perspective, we put forth our thoughts on the government’s role in the era of post pension-reforms across Europe and after the financial crisis. Obviously, this question is linked to the boundaries of the responsibility of the government as a mediator between participants, among generations, and as a regulator. This question is also connected to the socio-economic role the government plays in the achievement of social targets such as reducing income inequality and poverty.
2.2. Structure and Content This dissertation is divided into two parts, with the first part forming a base ground to the one that follows. The first part provides the theoretical and historical framework of pension designs as a solid basis for the subsequent analysis portion.
Chapter 2 overviews the fundamentals of modern pension schemes, their objectives in the modern era, and the ways they were organized. This dissertation started and concluded with descriptions of the pension system’s objectives, as it is claimed that, eventually, it is the interests of the pension field’s actors that significantly affect the pension design. In particular, the chapter details the variations in different pension funding, their ways of finance, and the consequent risk sharing. The theoretical framework of pension designs enables the deepening, in this thesis, of not only the pension’s risks and challenges but also the derived solutions to risk diversification, such as combinations of different pillars and implementation of risk-sharing mechanisms. The variety of pension concepts studied in this chapter are translated into repetitive motives across the rest of this thesis. Chapter 3 sets the theoretical and historical background of the evolution of pension systems. This includes the description of the challenges of government and societies in this era with increased aging and low fertility when it comes to financing adequate pensions for the aged. Moreover, this chapter overviews the evolution of pension schemes across Europe and presents the debate in the literature on proper pension schemes. This chapter analyzes the global process that privatized the pension market and prejudiced the level of benefits and standard of living for the older population.
The second part of Chapter 3 includes a literature overview of the late pension reform wave in Europe. Cross-national comparative studies on institutional differences and their outcomes provide an essential understanding of the consequences of a specific pension framework with regards to past and future reform needs. Such evidence-based policy advice is beneficial for future pension policies. Through this study, the challenges associated with pension plans, social security systems, and the outcomes of recent reforms will be brought to light. Significant weight is given, in this chapter, to the pension reversal trend in Latin America and CEE countries. In fact, there is an emergence of a new economic voice that challenges the merits of the traditional economics study, which asserts minimization of state interventions in the market. We analyzed the reasons for this trend and instigated thinking about the state’s role in the pension market. These two issues are getting important perspectives in the current times of financial crisis when the governments take the responsibility of executing large bailout plans.
The second part of the dissertation is essentially the core novelty of this work, containing theoretical, analytical and empirical research approaches. Chapter 4 characterizes the risks associated with the pension schemes from different perspectives and studies the balance between the interests of the central pension actors. In the conclusion, the study realized the significance of implementing risk-sharing mechanisms as a pre-condition to the sustainability of funded-capitalized pension schemes. The absence of such mechanisms in funded or mixed pension schemes may increase income gaps, foster old-age poverty, generate socio-economic anomalies, and weaken the system, especially in times of financial crisis and systemic shocks.
Chapter 4 is a theoretical study, which implements the portfolio theory of Markowitz on pension design (Markowitz, 1991). It is realized through the diversification of risks both for the public and the government, at some level. Mutual interests will push the pension design into an array of equilibrium of pension market design. Chapter 4 starts by characterizing the financial relationships between the pension field players. Here, the thesis argues that although the government shifts risks through funded pension designs, a pension scheme cannot be sustainable unless the government actively participates in the risk-sharing cycle and diversifies risks that is hard to be handled by an individual.
While shifting to a funded pension scheme, the government transfers deliberately un-diversifiable risk to the individual such as longevity risk, improving its fiscal obligations. In the opposite side, this dissertation claims that the individual does not stay indifferent. The pension reform is an opportunity for him to transfer, in some level, idiosyncratic risks, such as wage/career risk and structural risks that are connected to market failures. Not recognizing the risk-sharing mechanisms where the individual shifts idiosyncratic risks to the government may result in pension reversal. This composition enriches the literature on pension reforms in CEE countries (for e.g. Hinrich, 2021; Guardiancich & Guidi, 2020; Altiparmakov, 2018; Natali, 2018). Here, the argument is that due to insufficient government intervention in the market and risk-sharing mechanisms, which were realized by flowed market design, countries have rolled back to a dominant state’s PAYG pension schemes. Moreover, the fiscal challenge that CEE governments have faced during the financial crisis is a symptom of the bi-pathways of risks needed in the funded pension schemes.
Chapter 5 innovates while analytically revealing the socio-economic anomaly. In this chapter, the study deepens in relation to the public actor while avoiding the analysis of the public as a single actor versus the government. This composition differentiates among earning cohorts and their utility while transitioning to funded pension schemes. The chapter introduces a simple model that aims at maximizing the participant’s utility function in an economy with a multi-pillar pension scheme during the entire life cycle. The model includes an OLG model, two stochastic variables, and Monte-Carlo simulation techniques. The results show that the optimal pillar sized favors high-earning cohorts at the expense of low earners. Moreover, there is substantive exposure of low earners to financial risks due to high earners’ preferences. We relate to this situation as an 'Externality'. Consequently, this composition suggests two key features. The first one is the significance of substantiating weight for an unfunded pillar as a hedging asset. The second is a protection mechanism that addresses the model targets of alleviating old-age poverty and the influence of the plans’ weights.
In Chapter 6, the thesis analytically analyzes the risk-sharing mechanisms in the pension system from another angle, which is by linking pension schemes in order to exchange options’ benefits. The theoretical framework based on an option’s value model describes the interests of the actors in the pension field by shifting from the public PAYG pension scheme to a more capitalized one. Here, the option benefit model enables differentiation between high-earning cohorts and low-earning cohorts and once again avoiding to portray the public as a single player. The financial position reveals that during the transition, high-earning cohorts benefit at the expense of low earners, as shown in the previous chapter, using the utility function. Here, we highlight an intra-generational risk-sharing mechanism that acts as a stabilizer to the pension design, which may reduce the probability of another pension reversal. In particular, we focus on minimum pension guarantees in the form of an economic “collar".
This chapter presents the conclusion of the theoretical study through the global experience of individuals in CEE and Latin American countries. That includes pension reversals and strengthening of the public pillar in most of the countries that had implemented a funded pension scheme during the 1990s.
Chapter 7 is an empirical study. In this paper, we deeply investigated the Israeli pension system. Israel, as a country with a neoliberal pension system, is the closest country that fits the definition of a “pure defined contribution” scheme can be an excellent “playground” to study and analyze the implications and consequences of such a policy. One of the innovations of this dissertation realized in this study is the opportunity to calibrate the analytical part with data pertaining to the real financial records of more than 10,000 real individuals’ contributions and benefits collected from the largest private pension fund in Israel.
The calibrated model enables the analysis of the previous chapters’ outcomes regarding the vulnerability of pension benefits and the long-term effect of a financial crisis. In particular, this research is the most relevant during these days when the world is struggling with the COVID-19 pandemic. We especially look for anomalies and difficulties found in the previous part, in order to demonstrate them empirically, from real pension data. This research facilitates an opportunity for the discussion of future consequences of radical pension designs and the current financial crisis of benefits. Moreover, the investigation of such a unique database is refreshing in pension research and enables the study of the future consequences of funded-capitalized pension designs.
This thesis concludes with a summary of the main findings of the study in Chapter 8. In this composition, we translated the findings and conclusions to a few specific suggestions for central planners in order to ensure the implementation of a successful and coherent pension model. Moreover, this chapter explicitly sums up the main pension system challenges, particularly in dealing with poverty and inequality, and the main findings of the analytical model. This dissertation concludes by pointing out the issues related to future pension policies that are of key importance for both analysts and stakeholders.
Here, we heavily value the government’s role in managing the pension market, ensuring sustainability, and considering the interests of different players, including the public, financial institutions, and the past/future generations. The study’s final remarks also point to the limitations of this monograph and highlight future research needs and alternatives.
3. Conclusións 3.1. Main Insights The compositions in this dissertation offer a multi-faceted analysis of global pension policy. This type of analysis is necessary to capture the very essence of the multi-dimensional nature of different pension designs and the different players' interests in the market. The main findings set out below are an interplay between the global evolution of pension reforms and the individual's preferences, studied from the perspective of risk.
a. Different earning cohorts of participants and the governments are all actors in the pension field who are trying to shift undiversifiable risks to the other.
b. The government is a mediator and a central planner that can manage intergenerational and intra-generational risk among the actors.
c. One of the main keys that have put a favorable influence on market design is the extent that actors can share risk. Based on global experience over the last two decades, while shifting to funded pension scheme, one has to understand the kind of risks the government can diversify and hedge and what kind of risks are embedded in the pension scheme and cannot be transferred to a third party. Awareness to these kind of risks can help manage them more carefully in designing a coherent pension system.
d. Acquiring a lesson from the cyclical reforms across Europe and Latin America, the question whether a pension scheme will be sustainable or not depends in a critical mass of participant's financial position. While higher share of pension participants worsen in the pension reform, the probability of cyclical pension reform increases. The trigger to the re-reform is usually a financial slowdown. In these times, the individual has difficulty in diversifying personal and financial risks. Unstable pension landscape threats the trust on government policy and the country's economy. Additionally, as was find in this work, unbalanced funded pension scheme results in socio-economic tension among different earning cohorts in society.
e. The transition to a funded scheme creates a socio-economic anomaly that favors high-earning cohorts at the expense of low earning cohorts. That is realized in two dimensions: • The contribution rates are closer to high earning preferences and expose low earning cohorts to excessive financial risks.
• The financial position of high earners has improved considerably when compared with the deterioration in the financial position of low earners. That is realized by the ability of risk pooling and hedging risks.
f. Pension benefits under the dominant funded pillar are highly vulnerable to market fluctuations. The financial crisis, such as the current COVID-19 turmoil, may affect the future pension benefits to younger cohorts in the following years.
The risk perspective captured in this thesis is in line with the post-privatization literature strand (e.g. Orszag and Stiglitz, 2001; Holzmann & Hinz, 2005; Barr and Diamond, 2009; Espin-Andersen, 1996). The findings of this thesis strengthen the need for risk management in funded pension designs for both fiscal considerations and for the individual regarding the consumption throughout his life cycle and retirement.
The cyclical reforms described in chapter 3 have taught us that there is no single best pension design. Proper applications of the principles stated above can and lead to widely differing systems. Thus, it is not surprising that countries have successfully implemented very different pension systems (see Barr and Diamond, 2009). Countries have therefore chosen systems that vary from more or less pure consumption smoothing with a primary concern for poverty relief. A wide range of systems explicitly addresses both objectives. Chapter 3 traces pension reforms during the 1990s, their cause, and evolution. Also, the chapter opens a debate within the thesis, as a motive, discussing the reasons for some countries' reversals back to a state-dominated pension design.
Similarly, there is a wide range in the degree of funding (the extent to which benefits are financed from contributions). Some countries have significant reliance on funding (Canada, Israel, Chile, and Sweden), while others rely mainly on an unfunded pillar such as France, Germany, and Italy (ILO, 2018). Barr & Diamond (2009) claim that the way of funding the pension system is not the most significant thing, as the public finance one way or another for its consumption post-retirement. After agreeing on that assumption, we claim that the extent of the government intervention in the market signals the state's responsibility towards its citizens on a variety of issues. That may include income smoothing at retirement, alleviating income inequality, avoiding old-age poverty, etc. We discuss the state's role and its evolution in the pension market based on the findings in this dissertation.
Chapter 4 opens the theoretical aspect of this thesis. This composition explores pension risks that entail different actors in the pension field. That composition treats the pension as a portfolio. By that, this theory explains the financial relationships among players in the field. Implementing this theory on the global front, one may explain it as being one of the reasons for the cyclical reforms across CEE and Latin American countries.
We claim that the extent of the funded scheme and the design of the pension system depends on the ability of the public and the government to shift undiversifiable risks to each other. The first wave of reforms was clearly an attempt by the governments to shift to the public longevity risk that is translated to a fiscal burden. In other words, the government transfers un-diversifiable risk to the individual such as longevity risk, affecting its fiscal condition. On the contrary, the individuals transfer some portions of their un-diversifiable risk as poverty portion of wage/career risk and structural risks that are connected to market failures. We argue in this chapter that the bi-path ways of risk-sharing may explain the reversals of the trend in CEE and Latin American countries. The global experience implies that the total weight of government obligation to assure pension benefit adequacy depends on their ability to reduce structural risks in funded schemes. It means that as the following risks become higher and unbearable by the working population or retirees, the government has to intervene and take up more responsibility on its shoulders to assure a higher level of income adequacy upon retirement.
In chapter 5 the dissertation studies funded pension benefit outcomes as a function of contributions. Here we reveal that funded pension schemes include inherent socio-economic anomaly that in favour high earning cohorts at the expense of low earners. To alleviate this anomaly and the excess market risk exposure to low earners, it is suggested to implement a minimum pension guarantee with intra-generational risk sharing. We show the value of the insurance to all earning cohorts. The results of this study are quiet surprising as they point of a value of insurance also to high earning cohorts, who bear the financial burden to finance the insurance. It is shown that the preferences to the guarantee, by all earning cohorts, increases in financial crisis, when the market is volatile.
The same outcomes, from a different angle, were revealed in chapter 6 when studying the pension market from an exchange options perspective. The options exchange theory differentiates among earning cohorts and explains the financial position among earning cohorts and the government by financial option risks. In addition to the anomaly in funded pension schemes revealed in chapter 5, chapter 6 provides insights about the risk-sharing mechanisms, which alleviates this anomaly. That includes special characteristics learned from the exchange option theory. At the second part of this chapter, we show the demand for pension guarantee in funded schemes. That part strengthen the argument that as part of funded pension scheme the central planner has to implement minimum pension guarantee to ensure sustainability of pension design.
Chapter 7 delves in the funded pension scheme studying the government role in the pension market. This chapter includes an empirical composition, analyzing the adequacy of benefits in an almost purely funded pension scheme specifically in – The Israeli market. The suggestions from this study were the same as the theoretical chapters. This study points to the vulnerability of pension benefits from financial and labor risks. This research captures some of the current financial crisis due to the Covid-19 and shares the concerns of long-term influence of systemic risk on pension benefits. It is also suggested in this chapter to impose a minimum pension guarantee and risk-sharing mechanisms to alleviate the risk burden on individuals.
The thesis also includes a debate regarding the ways to finance the risk-sharing mechanisms, as one of the constraints in this study is to avoid tax-raising and further pension contribution to pension pillars. It is shown that implementing intra-generational risk sharing is the most efficient and effective way of alleviating the socio-economic anomalies as revealed by the study.
3.2. Policy Recommendations Here, we attribute several dimensions aiming at the central planners who design pension systems. The recommendations set below were processed from each chapter in this dissertation, detailing the key findings above, and present implications for these findings in different situations.
a. Specific pension design and the way of funding is not the most significant thing but the balance it creates is.
We argue that the specific pension scheme and its way of funding is only a secondary issue in providing old-age adequacy benefits. The way the pension scheme is organized needs to serve a certain point, as there is no crucial difference between funded schemes or PAYG non-funded schemes (Barr & Diamond, 2009; Brown, 2014; Orszag, & Stiglitz, 2001).
Pensions have multiple objectives. Some scholars focus on one while ignoring others. For example, the right weight for the first and second pension pillars. Policy analysis that focuses on a single objective, particularly if it does so implicitly, will be flawed. One should understand there is no single perfect design and it depends mostly on the different objectives and the underline economy.
This dissertation points out towards the importance of a more comprehensive pension designs. While conducting sustainable pension reform, a holistic approach needs to be put in place, whereby reformers can focus on both the system goals and constraints. A pension system should not be adequate simply in terms of poverty alleviation and/or consumption smoothing, but rather it needs to provide a fair deal to different generations and different earning cohorts. From the other side, for policymakers, the message is to avoid considering solely narrow fiscal targets. As was demonstrated empirically in this thesis, that path may lead to unintended substantive fiscal costs in the future and inadequate pension benefits for the participants.
Each country should design its own pension model suitable to its social targets, population's standard of living, and which alleviates the particular challenges in each economy, such as income inequality, intensive aging, market failures, high public debt, and so on. Anyway, there is no economic preference for one scheme over the other. Hence, no matter how many reforms be conducted over the coming years in every single economy, the market will need to manage certain risks and constraints to address specific goals.
b. recognizing different considerations for different players Pensions have multiple objectives, where some are more significant to the public and other to the government. Individuals seek consumption smoothing and insurance, while governments have additional goals, including poverty relief and redistribution which fall under fiscal constraints. In some economies, the pension markets are used to gain capital from the public to finance the public debt (Banyar, 2017). Analysis needs to take into account all of these considerations. There is no efficiency gain from designing one pension pillar without distortions of the other part.
In that context, we mention that the public is not a single player. Different earning cohorts and genders have different preferences and risk management capabilities (see also Haan, et al. 2020). There is a necessity to recognize these needs and to have balance among them. We attribute to the various players in the field in chapters 5 and 6 and are avoiding relating the public as a single player.
Future pension reforms should consider the consequences of past reforms. According to Nobel Laureate, Stiglitz, the consensus today is that the 'Washington Consensus' did not provide the answer (Stiglitz, 2004). Reforms have been guided by fiscal sustainability concerns and the net impact of risks of poverty for the current and future generations of pensioners. Though the recent pension reforms are expected to have significant economic effects, most of the studies that have been carried out to date have mainly focused on their effect on fiscal sustainability. This, in part, confirms that reforms were broadly driven by financial sustainability motives and less on pensioners' poverty . Hence, in the last decade, there developed a new strand in the pension literature that has been incorporated within this dissertation research, which tries to optimize the social pension goal of the pension systems while considering tight fiscal conditions in the era after the last financial crisis (Mesa-Lago & Valero, 2020).
c. Considering costs and budget constraints Spending on pensions must be compatible with a country's ability to finance the consumption of retirees in the long-term (Genser and Holzmann, 2018). In every pension design, one should remember that government expenditures for social targets entail costs that may cause tax raises, if not now perhaps in the future (Feldstein & Liebman, 2002). Also, there might be economic costs of the forgone resources used to implement social policy. Hence, the pension model has to attribute the utility on one side against the costs to another party. Accordingly, the models assumed in this dissertation in chapter 5 and 6 preserve fiscal expenditures level, constant Debt to GDP, and no tax-raising.
Also, to avoid the sensitive balance between unions and employees, concerning wage and proper contributions rates, the model treats employees' contributions as constant, both to social security and to funded pension plans. Indeed, in chapters 5, 6, and 7 we suggest methods for financing unfunded pension components without raising contributions or taxes. In any case, one might consider that in the steady- state employees' contributions may change relative to the workers' contributions level, due to political forces and fiscal constraints.
Social sustainability can only be achieved if policymakers understand these tradeoffs and optimize pension systems in this light. This concept of balancing the trade-off between system goals and constraints, through which the aims of the system for current beneficiaries continue to be achieved without putting excessive pressure on future generations of workers or reducing too much of their future benefits, underpins the approach taken in European Commission (2018).
d. Considering stress economic conditions In chapter 5 and 6, it was revealed that the financial crisis amplifies the socio-economic anomalies in a funded pension scheme. The results in chapter 7 point to the significant effect of the financial crisis on pension benefits adequacy. Based on the experience of pension reversals and the pension designs which emerged during the last years, we claim that these anomalies contribute to the pension reversals in CEE and Latin American countries. From the governmental perspective, financial turmoil might change its preferences in a short time. In other words, what might seem as alleviating fiscal burden might be realized as something that is causing fiscal stress in times of financial crisis, as was the situation in Poland and Hungary during the last decade (Naczyk & Domonkos, 2016). Consequently, it has been suggested to avoid dramatic steps during the financial crisis and to take into account the influence of such stressful situations in advance by implementing risk-sharing and balance mechanisms.
e. Creating a framework for full working life As studied in chapter 3, governments keep operating in parametric reforms increasing the retirement age, adapting pension systems to longevity risk and low fertility (OECD, 2020). Many countries, especially in Europe, are still struggling to increase the effective age of retirement beyond 60 or 65 to 67, which appears to be the current international standard for men and women alike.
Expanding the period of economic activity as longevity increases directly addresses a major cause of the impact of ageing on pension schemes. Furthermore, it is a powerful instrument to slow down expected increases in systems' dependency ratios, affecting both the numerator and the denominator (Meier et al. 2007). Therefore, it may allow for paying higher benefits but only if individuals can stay active for a longer period of their lives.
Successful policies in both of these areas are also important prerequisites for dealing with the ageing problem, if only for their positive impact on employment and GDP. Aspects that are particularly important for serious attempts at expanding the active life span of individuals relate to the supply and demand for older workers. For this strategy to work, several kinds of adjustments are required. First, individuals need to adapt their life-cycle plans, a major condition being that the changes in relevant rules are announced in good time. Second, firms may have to reconsider their current habits regarding additional training for older workers, and they may also have to think about working conditions and new jobs that are suitable for people working until age 67 and beyond. The central planner has to make incentives for the labor markets to hire older people.
From another perspective, the central planner has to take into consideration the risks and not only the macro-economic ones. One of the novel arguments of this dissertation is that along the individual's lifetime, the probability of different risks to realize increases. That not only includes financial turmoil but also periods of personal unemployment, market falls, and systemic risks. As the funded benefits are vulnerable to these risks, the government has to impose balance mechanisms such as unfunded pillars and minimum pension guarantees. Many of the parametric steps taken by governments since the 1990s, such as increasing the eligibility age to retirement, affecting the fiscal/financial adequacy of the supply institutions but ignoring the risk burden on the individual shoulders.
In this dissertation, we expand the discussion on minimum pension guarantee. Here we mention that considering a framework for longer life is compatible to this mechanism. According to Jimenez-Martin (2014) avoiding eligibility to early retirement helps to avoid substantial distortions in the incentives to work as individuals age.
f. Implementing Minimum Pension Guarantee in Funded Schemes In this dissertation, it was shown, in various ways that efficient funded schemes should include the pillar of minimum pension guarantee with intra-generational risk sharing mechanism. We show that guarantee implementation alleviates several of financial and systemic risks to all earning cohorts and increase the probabilities of sustainability to the pension design. By that, the guarantee creates value not only to participants but also for the government, as it reduces the possibility to pension reform. The necessity to social floor has been discussed analytically and empirically here and strengthen the literature in that aspect (for e.g. Ebbinghaus, 2019; Ortiz et al., 2018; Huyse et al. 2017; Gale et al. 2016; Orenstein, 2008).
Imposing governments guarantee, in any kind, is not insignificant subject. The assessment of whether to introduce investment return guarantee in the new pension schemes of the developed countries needs to be done in the context of the overall pension system. If public pensions already provide sufficient protection, investment returns may lose some of their purpose. Furthermore, one should evaluate the costs of government guarantee both fiscal and economic value influences. We discussed several ways to finance the guarantee as function of the market structure and the macro-economic conditions.
g. State regulation and supervision Supervision and monitoring are of major significance and recent innovations are expected to extend their importance even further and reinforce their public-private partnership (Ebbinghaus, 2019). Although this dissertation detail largely unfunded pension schemes imposed by the government, one has to remember, they are only residual to the government's direct actions in the market. Chapter 4 concludes that the maturity of the market and the level of regulation derive eventually the implementation of unfunded schemes and their weight in total benefits. Hence, to minimize the risks on the individual shoulders, there is a strong case for efficient supervision and monitoring of a mandatory funded tier by the state. These risks encompass a large variety such as financial, systemic, and asymmetric information (Kay, 2014).
3.3. Thoughts about the Government Role in The Pension Market The increasing trends in recent years toward DC schemes have brought to the fore the question of how risk should be distributed in the dimension of private pension systems. In some circumstances, where the various designs of DC plans suggest increasing the risk-bucket on the individual shoulders, the role of the state in private pension governance gains added importance. The debate on the state role intensifies in periods of the financial crisis, where the fiscal and individual interests crash in a short span of time (Fultz and Hirose, 2019).
Policymakers can do much to improve the major social insurance programs that protect old-age benefits at retirement. In the last two decades we witness that policymakers are starting to give due consideration to pension adequacy. Even in cases where benefit generosity has been reduced considerably, minimum pensions have been strengthened. The prospective effect of reforms on low-income households is becoming an integral part of impact assessments. That said, there continues to be a need to undertake a more holistic approach to pension reform. For instance, simply raising pension ages while doing little to help older workers remain in employment, such as providing assistance to boost their productivity, will not necessarily reduce the burden on the public purse.
Studying the gentle balance of the pension objectives, one might claim that the design of pension schemes represents social contracts among generations. The government's role is to ensure sustainability, fairness, and adequacy of these schemes where the government itself is a mediator among actors in the market and a central planner working on behalf of the participants to ensure these characteristics (Boyer, 2018). In the opposite approach, the state is an active player with interests of its own, affecting the pension system design. This approach can or may count on incentives to develop the markets or to alleviate income inequality gaps in the pension system. According to this approach, the government can also attribute the pension system as another path to borrow and finance state debt (Grech, 2018; Irwin, 2015).
Two similar countries with the same economic challenges can have different pension system designs because of differing perspectives of the state's role (Levi & Levy, 2018). In some countries, the debate of the state's role has not come to an end. That is true regarding France, Spain, Lebanon, and Israel and of course regarding many countries in Latin America and CEE countries (Ortiz et al. 2018). For example, one of the explanations for the difference between Britain and Germany in pension design is the historic differences of the state role as Beveridge and Bismarck argue, respectively (Disney & Johnson, 2001). Yet after financial shocks, the merits of the trust in the government actions may cause a stir to rethink the state’s role (Vis et al. 2011).
While during the pension wave reforms in the 1990s, the state partially retreated from its responsibilities to finance adequate public pensions, the scope for state regulation and control of private pensions increased, at least potentially (Mabbett, 2020). The retreat of the state from public pension commitments thus has not only increased the need to fill the retirement income gap by privately funded pensions but has also led to demands for better regulation of these pensions by the state and the social partners. Without such regulation, it may be questionable whether the funded pension route remains politically sustainable if it remains a rather risky business for more and more ordinary people facing retirement.
This thesis does not point to the extent of the optimal governmental intervention in the pension market, as it connects to the variation of countries' history, economic challenges, cultural influence, etc. However, the thesis details the future consequences of insufficient intervention by the government. For instance, we novel in chapters 5 and 6 that the absence of intervention in the pension market may realize in worsening socio-economic gaps. This work also advises the central planner to avoid excessive exposure of the individual to financial and personal risks in funded pension schemes. In chapters 4 and 7 we challenge the conservative economic strand from the 1990s. That strand of literature led by Chicago University, argues for reducing government intervention in the market (Friedman & Warshawsky, 1987; Feldstein, 1974). Here we argue that a funded pension system, with insufficient inherent risk-sharing mechanisms, during a financial crisis may be translated to fiscal spending for bailouts plans. We further demonstrate this argument in chapters 4 and 6 with the experience of CEE and Latin American countries after the last financial crisis.
Eventually, the state actions in the pension market are derived from an ideology and navigate along a strip of constraints and incentives to fulfill the public agenda (Levi & Levy, 2018). Tracing the evolution of the economic agenda of the 'Washington Consensus' and its crash teaches us a modest lesson in judging economic solutions to a variety of countries. There is no single answer of pension design for each country but a variety of opportunities and options for the state targets.
A comprehensive perspective on pension systems, labour market attachment, and standard of living during working-career and retirement, signifies the relevance of cross-national comparisons that study financial outcomes of the entire pension schemes to give policy advice (Cai et al. 2018). Different risk profiles require different pension system regulations to be adequately protected during old age. It is argued that this protection can be organized in various ways depending on the national circumstances and the political priorities (Fultz & Hirose, 2019).
