Alain Jousten

Long-Term Care Insurance and Optimal Taxation for Altruistic Children

We model long-term care insurance in an optimal taxation framework. Every adult decides upon the amount and type of care he purchases for his dependent parent. We consider two alternatives: nursing-home care provided by the government and home-care paid by the child with some lump-sum subsidy by the government. The only source of information asymmetry stems from the governments inability to observe the degree of altruism of the adult child for his/her parent. Further tax collection entails some social costs. In such a second best setting, we show that the quality of institutional care has to be kept relatively low and that compared to altruistic children, non-altruistic ones enjoy a high level of consumption.

The Effects of Early Retirement on Youth Unemployment: The Case of Belgium

In this paper, we describe the changes of (early) retirement programs over time and study the link between trends in elderly labor force participation and youth unemployment. From a theoretical point of view, there is no convincing argument that the idea of a lump-of-labor should hold. Our empirical results comfort this finding, and indicate a very weak link, if any, between elderly retirement and activity among the young and the prime-age populations.

Public Pension Reform: A Primer

The present paper reviews key issues in pension design and pension reform encountered all across the world. The paper heavily refers to the recent U.S. Social Security reform debate in general and to the Personal Retirement Accounts proposal in particular. A particular emphasis is put on annuitization and risk-taking in the economy. Our discussion signals some inadequacy of the proposed measures with respect to the goals of viability of the system and individual financial security during retirement.

Conceptualizing, Measuring and Financing the Legacy Costs in an NDC Reform

The paper provides a framework for the conceptualization, definition and measurement of the legacy costs that needs to be addressed in a reform that transforms an unfunded (or non-financial) defined benefit (NDB) scheme into an equally unfunded notional (or non-financial) defined contribution (NDC) scheme. During a transition from NDB to NDC a financing gap typically arises due to accrued to date liabilities from the old system in excess of the NDC schemes sustainable flow of benefits. This gap – or legacy cost – needs to be estimated and best explicitly financed. We illustrate different techniques to gauge the scope of the cost. The paper applies the proposed approach to a hypothetical NDC reform in China.

Pensions and Savings in a Monetary Union: an Analysis of Capital Flows

We analyse the economic impact of a simultaneous aging shock in two countries. The countries are identical in all respects except the financing scheme of their public pension system. While one relies on capitalization, the other one relies on a pay-as-you-go scheme. We show that the two countries react very differently to the demographic shock and its financial implications. Further, we find that the presence or the absence of capital mobility considerably affects the results, both in terms of the size of the burden as in terms of international capital allocation.

Disability in Belgium: There is More than Meets the Eye

The paper provides a perspective on the development of the Belgian disability insurance system. Using both survey and administrative data, it sketches a picture of the (changing) factors leading towards disability, as well as the outcomes in terms of program participation. The paper shows the key role of integrating other forms of early retirement programs into the analysis. The main findings are an unspectacular trend in the number of DI beneficiaries over time combined with a strong expansion of (early-) retirement schemes.

Health Status, Disability and Retirement Incentives in Belgium

Many Belgian retire well before the statutory retirement age. Numerous exit routes from the labor force can be identified: old-age pensions, conventional early retirement, disability insurance, and unemployment insurance are the most prominent ones. We analyze the retirement decision of Belgian workers adopting an option value framework, and pay special attention to the role of health status. We estimate probit models of retirement using data from SHARE. The results show that health and incentives matter in the decision to exit from the labor market. Based on these results, we simulate the effect of potential reforms on retirement.

Addressing the Legacy Costs in an NDC Reform: Conceptualization, Measurement, Financing

The paper provides a framework for the conceptualization, definition and estimation of legacy costs that need to be addressed in a reform that transforms an unfunded defined contribution (NDB) scheme into a notional (or non-financial) defined contribution (NDC) scheme. As the new contribution rate is fixed and, perhaps, reduced, paying for the accrued to date liabilities leaves a financing gap that needs to be covered. The paper comes to the following key conclusions: (i) to render an NDC reform credible and fully effective in its desired results, it is crucial to determine the legacy costs of the reformed system – no matter how these costs will be financed; (ii) for a shift from an NDB scheme to an NDC scheme with a fixed and long-term-sustainable contribution rate, the legacy costs amount to the actuarial post-reform deficit, and are finite; (iii) two key sources of the legacy deficit are identified: inherited legacy costs reflecting prior reforms and benefits above the steady-state under the old scheme, and reform-induced new legacy costs due to the shift toward a lower sustainable contribution rate; (iv) to estimate legacy costs, actuarially and macro-economically based projection models have advantages over pure actuarial studies, as they are less dependent on very technical parameter assumptions that may not be consistent with general equilibrium considerations; (v) distributive effects play both at the intergenerational and intra-generational level, as benefits and costs of the reform are borne unequally by different subgroups of the current and future population; (vi) to improve equity and efficiency aspects of an NDC reform it is strongly suggested to address legacy costs in an explicit manner and with external financing; (vii) in the developing world, one promising way to co-finance the legacy costs is the use of an increased coverage to strengthen the PAYG asset; (viii) for developed countries, theoretical models show that tax financing in particular via indirect taxes such as VAT is an interesting tool, but empirical limitations tend to dampen the real-world usefulness.

Pension Provision in The United States

The US retirement income system relies on two big pillars: on the one hand the public Old-age, Survivors and Disability Insurance (OASDI), also called “social security”, and on the other hand private pension arrangements. The social security system is based on the insurance principle. Social security is not trivial, as it covers approximately 96 per cent of jobs in the US. Coverage has expanded quite rapidly and social security spending as a share of GDP has doubled between 1970 and 2000. Benefit payments in 1996 represented US

New Evidence on the Social Security Incentives as Drivers of Retirement Behavior

305.2 billion1, or approximately 4.59 per cent of US GDP. In 1994 91 per cent of elderly households received social security income. In 1996 43.7 million people received monthly benefits. But also at the individual level social security represents a major income source. Calculations from Diamond and Gruber (1999) illustrate that for 16 per cent of households social security represents the only source of income. Furthermore social security represents more than 50 per cent of income for three-fifths of the beneficiaries aged 65 or older. None the less the system is distinctly smaller in size than its counterparts in most continental European countries. In Germany for example the public retirement systems accounted for approximately 13 per cent of GDP in 1995. In Belgium the figure was approximately 10.6 per cent for the same year.