Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models

Abstract

a b s t r a c t a r t i c l e i n f oThe objective of this paper is to inquire the consequences of some simplifying assumptions typically made in the overlapping generations (OLG) models of pension systems and pension system reforms. This literature is largely driven by policy motivations and the alternative modelling choices are rarely discussed. On the other hand, the complexity of general equilibrium OLG modelling necessitates some simplifications in the model. We run a series of experiments in which the same reform in the same economy is modelled with six different sets of assumptions concerning the functional form of the utility function, time inconsistency, bequests' redistribution, labour supply decisions and internalization of the linkage between social security contributions and benefits in these decisions as well as public spending. We find that these assumptions significantly affect both the size and the sign of the macroeconomic and welfare measures of the policy effects with the order of magnitude comparable to the reform itself.

Inequality in an OLG economy with heterogeneous cohorts and pension systems

“…An alternative to log-linear preferences is to assume Greenwood et al (1988), which relate labor supply directly to changes of wage rate. However, in a recent study, Bielecki et al (2015) demonstrate that in the context of OLG the shape of the utility function has much less of a role in determining the labor supply reaction, as the key element is making agents account for pension benefits in the labor supply decisions, which our setup does.…”

The optimal rate of return for defined contribution pension systems in a stochastic framework

“…Agreeing with Lee ([14]), who highlighted that most literature "... takes a comparative steady state approach and does not deal with nosteady situations and none of it addresses the specific problem of how to measure the rate of return to a non-steady state PAYG pension system..." (p. 147), it should be noted that the issue is mostly addressed by means of theoretical models, where the assumptions can significantly affect the evaluation of the pension system's state, see e.g. [15], or by proposing sophisticated forecasting models, see e.g. [16], which deeply explores the issue using eight different versions of the Swedish pension system.…”