Political Risks of Pension Systems.
SEPPÄNEN, JUHA (2001)
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SEPPÄNEN, JUHA
2001
Kansantaloustiede - Economics
Taloudellis-hallinnollinen tiedekunta - Faculty of Economics and Administration
Hyväksymispäivämäärä
2001-06-05Sisällysluettelo
INDEX 1. INTRODUCTION 1 2. THE BACKGROUND OF PENSION SYSTEMS 4 3. PENSION SYSTEMS 9 3.1 GENERAL 9 3.2 PENSION SYSTEMS 11 3.2.1 Pay-as-you-go system 11 3.2.2 Fully funded system 15 3.2.3 Defined benefit and defined contribution systems 18 3.3 COMPARISON OF PENSION SYSTEMS 21 4. POLITICAL RISKS 25 4.1 GENERAL 25 4.2 RISK CAUSED BY DEMOGRAPHIC CHANGES 27 4.3 RISK CAUSED BY ECONOMY 28 4.4 RISK CAUSED BY POLITICAL INTEREST GROUPS 30 4.5 RISK CAUSED BY TIME-INCONSISTENCY 34 5. THE INFLUENCE OF A POLITICAL SHOCK IN THE ECONOMY 38 5.1 MODELLING THE ECONOMY 38 5.2 POLITICAL RISKS IN A PENSION SYSTEM 42 6. MEASURES TO INSULATE PENSIONS FROM POLITICAL RISKS 45 6.1 GENERAL 45 6.2 INSULATION FOR DEMOGRAPHIC AND ECONOMIC REASONS 47 6.3 INSULATION FOR PRESSURE GROUP AND TIME-INCONSISTENCY REASONS 49 6.4 COMPARISON OF PENSION SYSTEMS UNDER POLITICAL RISKS 52 7. CONCLUSIONS 55 REFERENCES APPENDIX
Tiivistelmä
This paper is a study of pension systems and political risks. In the paper I introduce four types of pension systems: pay-as-you-go, fully funded, defined benefit and defined contribution, and contribute a comparison between these systems. I also introduce the concept of political risk and make a comparison of the different sources that cause such a risk. The purpose of the study is to reveal what kind of political risks different pension systems have and how these systems can be insulated from such risks.
The different sources of political risks that are discussed in this paper consist of: demo-graphic, economic, political influence and time-inconsistency of politics. For both demographic and economic changes, political risks can not be insulated very easily. The best way is to estimate the future and prepare the system to meet expected variations. For the other two causes, political influence and time-inconsistency, pension systems can be better insulated. Methods for insulation vary from taking pension funds away from the hands of the government, to creating an incentive for individuals to be part of the system.
All pension systems face some kind of political risks and therefore are vulnerable to changes. Many of the risks can be eliminated but some of them are left in the hands of politicians. This is a matter of trust from the individual’s point of view and if govern-ments prove themselves to be trustworthy, the rest of the political risks can be avoided. A fully funded system with individual accounts seems to be the best system to insulate political risks. However in this system, governments’ hands are tied in the case of wanted redistribution.
Keywords: Pension systems, political risks, pressure groups, time-inconsistency
The different sources of political risks that are discussed in this paper consist of: demo-graphic, economic, political influence and time-inconsistency of politics. For both demographic and economic changes, political risks can not be insulated very easily. The best way is to estimate the future and prepare the system to meet expected variations. For the other two causes, political influence and time-inconsistency, pension systems can be better insulated. Methods for insulation vary from taking pension funds away from the hands of the government, to creating an incentive for individuals to be part of the system.
All pension systems face some kind of political risks and therefore are vulnerable to changes. Many of the risks can be eliminated but some of them are left in the hands of politicians. This is a matter of trust from the individual’s point of view and if govern-ments prove themselves to be trustworthy, the rest of the political risks can be avoided. A fully funded system with individual accounts seems to be the best system to insulate political risks. However in this system, governments’ hands are tied in the case of wanted redistribution.
Keywords: Pension systems, political risks, pressure groups, time-inconsistency