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Introduction Outline Some concepts Normative approach Positive approach Evidence: Latin America Evidence: EU Conclusion The Case for Universal Minimum Old Age Pension Pierre Pestieau CORE, CREPP and PSE September 23, 2010 Pierre Pestieau The Case for Universal Minimum Old Age Pension

The Case for Universal Minimum Old Age Pension

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Page 1: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

The Case for Universal Minimum Old Age Pension

Pierre Pestieau

CORE, CREPP and PSE

September 23, 2010

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 2: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Introduction

Different approaches in developed and developingcountries:

Scarcity of public funds

Importance of informality

Role of the family as old age support

Recent interest for minimum pension in LDC (WorldBank, ILO)

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 3: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Outline

Introduction

Concepts and taxonomy

Normative approach

Positive approachSome evidence. LA and EU

Old age povertyImpact and cost of minimum pensions

Conclusions

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 4: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Some concepts

A pension system includes both private and publicschemes, particularly when the private schemes aremandatory and subsidized.

Minimum pension:means-tested or unconditionalfamily based or individualized

Old age: when does it start?clear impact on the costcontingent on longevity

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 5: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pluses and minuses of means-testing versusuniversality:

cheaperopen to disincentivesaffects family arrangement when based on familystigma

Pension formulap: the level of pensiony : the level of lifetime earningEy : the mean value of yτ : the flat rate of contributionα: the contributiveness (Bismarckian) parameter

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 6: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

We can write

p = τ(α y + (1− α)E y)

Types of pension system:Bismarckian: α =1: pension = private savingBeveridgean: α = 0Means tested: α < 0

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 7: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

α = 0, Beveridgean

α =1, Bismarckian

α < 0, Means tested

p

y

Pension systems

p = max[τ(α y + (1− α)y), 0]

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 8: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Normative approach

First question: why to focus on old age?Ascending altruism weaker than descending altruismIssue of responsibilityNo other way to help.

Second question: why to focus on poverty andnot inequality?

Less costlyRawlsian concept of justice

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 9: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Political economy

Observation of individual practices can beinformative.

Surveys show that voters are more willing tohelp poor in old age than in working age.

In general public pensions tend to be moregenerous where they are Bismarckian.

Voting theory vindicates this view: Programs forthe poor are poor programs.

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 10: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Using the parameters τ for generosity and α forcontributiveness (non redistribution), onetheoretically shows that

a Rawlsian decision maker would choose a positive αif τ is chosen by voteτ increases with α.

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 11: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Evidence: Latin America

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 12: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 13: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 14: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 15: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 16: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 17: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Evidence: EU

Poverty rates for the elderly population, before and after the universal

pensions

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 18: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Disincentive effects of means-testing and HH approach

Labor supply

Saving

Marriage

HH formation

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 19: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Limits of minimum pension at alleviating poverty

Take up issue (stigmatisation)

Sharing with non elderly and poor HH members

Non financial needs (health and care)

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 20: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Cost is a function of

age at which benefits are awarded

prevailing longevity

generosity of benefits

efficacity of means testing

fiscal capacity of the country concerned

Pierre Pestieau The Case for Universal Minimum Old Age Pension

Page 21: The Case for Universal Minimum Old Age Pension

IntroductionOutline

Some conceptsNormative approach

Positive approachEvidence: Latin America

Evidence: EUConclusion

Conclusion

Crucial question: should fighting poverty in oldage be a priority?

Other question: means test or universal scheme?

Pierre Pestieau The Case for Universal Minimum Old Age Pension