This is an abridgement of Barr and Diamond's 'Reforming Pensions:
Principles and Policy Choices' (OUP, 2008), a larger book that is
intended for policy makers and as a supplement in college courses.
The problem. Mandatory pension systems are a worldwide phenomenon.
However, with given contribution rates, monthly benefits and
retirement ages, pension systems are not consistent with three
long-run trends - declining mortality, declining fertility, and
earlier retirement. Thus many systems need reform. Principles. This
book gives an extensive but nontechnical explanation of the
economics of pension design. The theoretical arguments have three
elements. 1. Pension systems have multiple objectives - consumption
smoothing, insurance, poverty relief, and redistribution. Good
policy needs to bear them all in mind. 2. Good analysis should be
framed in a second-best context - simple economic models are a bad
guide to policy design in a world with imperfect information and
decision-making, incomplete markets and taxation. 3. Any choice of
pension system has distributional consequences, which the book
recognizes explicitly. The analysis includes discussion of labor
markets, capital markets, risk sharing and gender and family, with
comparison of PAYG and funded systems, recognizing that the
suitable level of funding differs by country. Alongside the
economic principles of good design, policy must also take account
of a country's capacity to implement the system. Thus the
theoretical analysis is complemented by discussion of
implementation, and of experiences, both good and bad, in many
countries, with particular attention to China and Chile. Policy
conclusions: 1. Sound application of the principles outlined above
can and does lead to widely different systems in different country
settings. 2. Unless there are transfers from outside the system,
any improvement to the finances of a pension system must involve
one or more of (a) higher contribution rates, (b) lower monthly
pensions, (c) later retirement at the same monthly pension, (d)
policies designed to increase national output. 3.The previous
statement holds whatever the degree of funding. If a public pension
is regarded as unsustainable the problem needs to be addressed
directly by one of these methods.
General
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