Assessing the Distortions of Mandatory Pensions on Labor Supply Decisions and Human Capital Accumulation : How to Bridge the Gap between Economic Theory and Policy Analysis
Mandatory pension systems play a major role in individual savings and labor supply decisions. In particular, it is well known that defined benefit pension schemes, which are not actuarially fair, can create incentives for early retirement and there...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2007/09/8323915/assessing-distortions-mandatory-pensions-labor-supply-decisions-human-capital-accumulation-bridge-gap-between-economic-theory-policy-analysis http://hdl.handle.net/10986/7348 |
| Summary: | Mandatory pension systems play a major
role in individual savings and labor supply decisions. In
particular, it is well known that defined benefit pension
schemes, which are not actuarially fair, can create
incentives for early retirement and therefore reduce labor
supply and the stock of human capital in a given country.
This is an important policy issue in middle-income
countries, with still low participation rates in the labor
force, where the "window" opened by the
demographic transition is already closed or will close in
the near future. In these countries, policies to stimulate
private sector growth, competitiveness, and employment
creation should be accompanied by policies that increase
labor force participation, raising the ratio of active to
inactive population and therefore the potential for higher
income per capita growth. Unfortunately, the analytical
tools developed to assess pension reform options tend to
focus on the financial sustainability of the schemes and the
adequacy of benefits. Little attention is given in practice
to the social costs imposed by distortions on the supply of
labor. In part, this is given by the lack of analytical
tools that, in the context of limited information regarding
individual preferences and behavior, can be used to assess
the magnitude of these distortions. This paper develops
methodologies that can bridge the gap between economic
theory and the practices of pension policy personnel under
conditions of deep uncertainty regarding the variables
driving individual behavioral responses to policy changes.
First, the paper develops an indicator to predict the
age-specific retirement probabilities induced by a
particular pension system, given heterogeneous individual
preferences over risk, consumption, and leisure. The paper
then describes how this indicator can be used to project the
size of the labor force by gender, age and skill level and
therefore the dynamics of human capital accumulation. The
integration of these two analytical tools allow us to show
the impact of a particular pension reform proposals on the
dynamics of labor supply, human capital and, given the
dynamics of capital and total factor productivity, economic
growth. Furthermore, the paper develops a set of life-cycle
income measures for typical individual paths that allow us
to measure the contribution of segmented pension schemes to
the segmentation of the labor market. The methods are
applied to the case of Morocco. |
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