J. Michael Orszag

Unemployment Accounts and Employment Incentives

We explore the far-reaching implications of replacing current unemployment benefit (UB) systems by an unemployment accounts (UA) system. Under the UA system, employed people are required to make ongoing contributions to their UAs and the balances in these accounts are available to them during periods of unemployment. The government is able to undertake balanced-budget interpersonal redistributions among the UAs. At the end of their working lives, people could transfer the remaining balances on their UAs into their pensions. We present an analytical framework to analyse the incentive effects of UAs and calibrate our model for the high unemployment countries of Europe. Our results suggest that this policy reform would significantly change peoples employment incentives and could achieve reductions in unemployment without reducing the level of support to the unemployed.

Unemployment Vouchers versus Low-Wage Subsidies

The paper examines the relative effectiveness of two policy proposals in reducing unemployment and working poverty: unemployment vouchers and low-wage subsidies. The unemployment vouchers are targeted exclusively at the unemployed (especially the longterm unemployed) and are provided only for a limited period of time. The low-wage subsidies, on the other hand, are granted to all low-wage earners regardless of their employment history and are of limitless duration. Our analysis indicates that the relative effectiveness of the two policies depends on workers’ prospective wage growth. The more upwardly mobile workers are (i.e. the more their wages rise with employment duration), the more effective will unemployment vouchers be relative to low-wage subsidies. Conversely, the greater the danger that workers come to be trapped in dead-end jobs with flat wage profiles, the more effective will low-wage subsidies be relative to unemployment vouchers.

Health Accounts and Other Welfare Accounts

Many countries with generous social insurance are currently forced to cut back or modify their systems. At the same time many developing countries lack social insurance for large segments of the population. Health accounts may offer a way of implementing health insurance that keeps a lid on costs and provides better incentives than traditional public or private health insurance. This paper discusses health accounts and other savings-account based social insurance.

The Costs of Early Retirement in the OECD

Despite substantial increases in longevity, the age of retirement in the industrialized countries has steadily fallen throughout most of the 20th century. In 13 OECD countries, the employment-population ratio of 55-64-year-old males fell by an average of more than 12 percentage points between 1979 and 1998. Similarly, labor force participation rates for those 65 and above have fallen significantly. The economic cost of the low labor market participation, in terms of lost output, benefit payments, and lower tax base is substantial. However, part of the cost of low labor market participation is cyclical or structural and, hence, separate from the costs of early retirement. This paper develops a simple framework to assess the specific costs of early retirement and applies it using data from the OECD countries.

Ruin in Retirement: Running Out of Money in Drawdown Programs

This paper analyses income drawdown programs where individuals choose a starting level of income and consumption growth levels so that they are certain to run out of money at some age. We compare the consumption in such a drawdown program with the level of consumption from an annuity. Our analysis shows that for individuals to prefer the drawdown program to an annuity because of higher initial income levels, they must be willing to forego all consumption for a majority of their expected period of retirement.

On Target: An Examination of CEO Stock Option Performance Hurdles

In this paper, we have looked at the choice of performance targets using a unique panel database on UK CEO executive option performance targets. Using this data on performance targets along with governance data and financial data for company accounts with year ends from 2001 to 2003, we find that the rate of switch in types of targets and in levels of targets has been slow. Furthermore, those with high levels of institutional shareholding are less likely to use pure EPS targets, perhaps because that pure EPS targets are inconsistent with the relative performance targets predicted by agency theory. We find confirmation of the correlation between levels of targets and average analyst estimates of earnings but at the same time higher forecasts only translate into weakly higher targets. We also conclude it is difficult to predict changes in targets from any variables in our dataset and indeed when changes in target levels occur they tend to be rather large.

Are Performance Conditions on Executive Options Driven by Fundamentals

A special feature of UK executive pay is the heavy reliance on performance conditions for executive share options. Using data compiled from 2002-2003 Remuneration Committee reports of 130 of Britains largest companies as well as linked data on analyst earnings forecasts and realised earnings, this paper computes probabilities of Britains CEOs meeting their performance conditions and how much this varies across firms. Our main findings are that there is not much cross-company variation in how tough performance conditions are, though there are some outliers. We also find that the probability of meeting the targets depends on certain fundamental variables such as the number of non-executive directors, salaries of the chairs of the remcom committees, CEO tenure, CEO base pay and CEO notice periods. While most of the variables have the some sign as expected from theory, the statistical relations are weak. Overall, our results provide some support that good corporate governance leads to tougher targets for CEOs but at the some time the weakness of these links suggests that there is still much room for improvement.

How have Older Workers Responded to Scary Markets

The past few decades have witnessed a global move towards private provision for retirement through individual defined contribution pensions at the expense of publicly provided and employer-sponsored defined benefit pensions. As a consequence, workers and retirees are becoming increasingly exposed to uncertainties in financial, labour and economic markets. The contributors to this book analyse the implications for retirement income policy, workers and retirees in view of the current climate of heightened exposure to scary markets. The implications of a broad range of scary market scenarios are presented, and novel solutions prescribed. Retirement incomes across a number of countries including the US, the UK, Japan and Australia are explored.

Pensions: Corporate Finance and Capital Markets

Because a significant portion of corporate financing is implicitly handled through pension vehicles, pensions are a quite important part of corporate finance and corporate financial policy. Yet many aspects of the interaction between pensions and corporate finance are imperfectly understood at both the theoretical and empirical level. This paper reviews the literature on the link between corporate pensions, corporate finance and capital markets.

Portfolio Choice with Consumption Growth and Variance Targets

This paper explores portfolio allocation when individuals target the mean and variance of consumption growth. These consumption targets lead to an optimal mix of equity which depends on the equity risk premium, the rate of return on riskless bonds, the desired rate of escalation of consumption and the tolerance of the individual for risk.