Dynamics of transition to universal tax-funded pension system
Yeoryios Stamboulis
Dept. of Economics, University of Thessaly, ystambou@uth.gr
Abstract
The mainstream policy debate on the issue of pensions is focused on the dipole between
“privatization” according to the capitalization system and “trilateral funding’, where the
reasoning of restitution and of capitalization often co-exist. Both perspectives, however, are
quite sort-sighted: the pension system is perceived as a closed system, without major
interactions with the economy.
Mainstream accounts are also subjugated by the anxiety over the impact of demographic
dynamics (also perceived as a closed system) and “fund viability”, as well as by a certain value
set with the following key elements: link of the right to pension with past paid employment,
unidirectional character of inter-generational solidarity, treatment of contributions as part of
labor compensations (and hence part of the wage cost) and not as tax on paid employment
(labor).
A radically different approach is proposed here. Pension is not treated as a result of savings,
but as a right to decent active retirement and part of a guaranteed income system.
Contributions are regarded as taxation on labor.
The impact of the transition to a universal pension system (possibly income-tested) is
examined under a broader set of socio-economic performance, such as fiscal burden and
employment.
The core structure of a model of and universal pension system the results of the transition to
it (fiscal burden, tax revenue, and employment) are presented. Results were drawn from a
system dynamics simulation, based on the data of the Greek economy (demographic forecast,
pension system rules etc.) It is shown that the transition to the new system would be beneficial
in terms of fiscal burden as well as employment.
Keywords: pension system, universal pension, system dynamics, employment, lean thinking,
30 hour-week, Greece
Jel classification: H55, J3, Q0O
1. Introduction”
Pension systems are at the forefront of policy debate and intervention. The key objectives
addressed are: “to prevent old age poverty, to enable pensioners to maintain their previous
standard of living and to promote solidarity within and between generations...” while
“adapting their pension systems to more flexible employment and career patterns” (Schludi,
2005), but at the same time to reduce the burden on government budgets (Council of the
European Union, 2010) raising questions on the feasibility of stated social objectives (Schludi,
2005). Solutions are most commonly sought along the lines of increased contributions,
reduced benefits and rise of statutory pension age. The threat most often stated as a key issue
is that of demographic trends towards an aging society. Links to other issues, such as
employment, are considered practically marginal in the dominant debate (OECD 2011),
although they are emphasized in policy documents: e.g. “raising employment rates and
productivity” (Council of the European Union, 2010).
“1am obliged to Michael Agorastakis for his help with demographics, Leda Zeliou for work on earlier stages of
this project and Spyros Lazarou who assisted with model runs in many instances.
Until now all attempts of reform have accepted the structure and the dominant logic of the
system, i.e. that pensions should be the result of working time contributions and that the state
should only provide support for low incomes’. The approach adopted here is more holistic.
The pension system is considered as part of the tax system. Its impact on economic activity,
more specifically on consumption and employment, is considered in a dynamic fashion. A
system dynamics model is built, in order to achieve this?. The model is based on the Greek
case.
The results show that the dominant logic may be challenged with substantial benefits for
employment as well as fiscal policy. The sensitivity of the model against various assumptions
and policy options is examined.
2. The boundaries of Pay-As-You-Go systems
During the last couple of decades, pension systems in western societies have been at the
center of policy initiatives that have failed to fulfill the mandate for sustainable provision for
citizens after their working years. Pension funds have been established for the operation of
contribution-based systems, managed either by the state or privately. Most operate as Pay-
As-You-Go (PAYG) systems, i.e. the currently employed provide the funds for current pensions.
Few operate as purely insurance-like systems, but most are supported or guaranteed by the
state. The first are vulnerable to demographics, while both are exposed to high
unemployment as well as investment and economy related risks. During the last twenty years,
most European countries have made attempts at reducing the fiscal burden due to pension
obligations, with poor results (OECD, 2011).
A deeper look is required in order to comprehend the reasoning and operational necessities
governing the evolution of the system, which led to its current state and its failures. While the
historical conditions that characterized the context of this process are beyond the subject of
this work, it is important to highlight the most salient aspects of this process. Modern pension
systems are the product of an evolutionary process that has taken place mainly during the 20"
century. Pensions have been a critical element of the historic phase of the postwar social
contract; still they were the result of long struggles — which may be traced back to the previous
century — and were not concluded all at once. As part of the social negotiation, the consensus
reached was actually a compromise that excluded significant parts of society, most notably
women and the unemployed. This compromise was engulfed by the ethics based on the
principle that ‘labor had to be compensated’ and an accompanying rule of justice that was
based on an analogy to the return on investment (ROI). Starting from different principles
almost all countries run a pension system that combines “insurance-like” (Overbye 1994)
earnings-related pensions (funded mostly by wage-based contributions, but usually also tax
funded) and pension supplements (tax-funded and usually means tested)?. The dominant
mode of thinking has been characterized by a common set of principles and values: “normal”
pensions are intended for those that have worked; income maintenance has been a key
principle from the onset; the state supplements the system, so the aim of should be to
minimize the burden on gross wage expenditure and on government budgets. Pension
supplements are intended for that part of the population not employed (at all or for sufficient
time), thus not participating in contribution based systems.
As Hletsos (1993) and Robolis and Hletsos (1999) argue the crisis of the pension system, and
the social insurance system in general, is inextricably linked to the crisis of the fordist mode
of production. A key factor is the dissolution of the key role of full time wage labor, a
1 For a brief chronology of the policy initiatives on the Greek system see Tinios (2010, pp. 263-264)
2 There are very few such modeling attempts. Petrides and Dangerfield (2004) also developed a system dynamics
model, but examined a policy at the opposite direction of a system fully funded by contributions.
3 For a detailed review one may see Blackburn (2002, 2007) and Overbye (1994, 1997).
fundamental prerequisite of the postwar pension system and welfare state. The attack on
labor - through the introduction of “flexibility” in employment conditions and the creation of
a general state of insecurity (precarious employment - ironically advertised as ‘flexicurity’ in
the context of rising unemployment and expectations of jobless growth) - coincided with
waves of structural unemployment. Both undermined the foundations of the system, as it was
built based on the assumption of full employment. On another front, the attempt of
neoliberalism to seek an exit from the crisis of over-accumulation through the shift to
financialization led to pressures for similar changes in the management and structure of the
pension system: the insurance-like approach was intensified alongside a new trend of asset
management of accumulated contributions, “capitalization”. This in turn has exacerbated the
role of pension funds as part of the financial system operating as a mechanism reproducing
the mode of growth and the crisis of over-accumulation (Blackburn 2002), rendering the
financial sector a key stakeholder (Ghilarducci 2008).
This perspective of the structure of the system operates as a distorting mechanism, shifting
the focus of the debate and discourse from the real issue, i.e. the welfare of retirees, to a false,
essentially irrelevant issue: the viability of pension funds. As a result conservative, neo-liberal
discourse thrives by shifting the focus to the minimization of benefits or the increase of
statutory pension eligibility age. Alternatively, some may focus on reducing labor cost for firms
(by reducing contributions with obvious detrimental results for the pension system itself),
ignoring macroeconomic and fiscal issues.
Let’s see how this works in detail. The problem is viewed as one of balancing a closed system
(Figure 1) of inflows (contributions and state subsidies — i.e. fiscal/budget burden) and
outflows (pensions). Contributions from workers and employers must cover as much as
possible current pension payments. The term “pension system sustainability” implies nothing
more than the mandate for minimizing fiscal/budget burden.
Figure 1: A narrow view of the system
Budget Byrden
Systém Payments
System| Revenue
wa \
Employed reo ‘of
System Balance
Level of
Contributions
Eligible Retirees Pension Level
This perspective leads to dead-ends when a solution is pursued within its logic. In order to
reduce deficits — i.e. fiscal burden - there are two obvious “solutions”. First, increase revenue
through a rise in employment (!) or a raise in contributions (Figure 2). However this is highly
unpopular with workers (leads to reduced income) and employers (leads to higher wage cost).
Consequently, it operates as a motive for undeclared employment (dodging contributions),
leading to further reductions of revenue and higher fiscal burden. This dynamic is often used
as an argument for the reduction of contributions, with the aim to increase revenue via
reduced undeclared employment and to raise the competitiveness of firms due to lower wage
cost.
Figure 2: The “obvious solution”: increase contribution
fe Se
Budget i, Ss,
Ne Payments
= } \
s — ‘System Balance J \
o L SN
sony \ - A
= © Kod
ai Eligible Retirees Pension Level
y)
Level of
Contributions
On the other side there is left the option of reducing system payments, either by reducing the
number of eligible retirees (usually through raising age limits of working time requirements)
or reducing by pensions— under the pretext of fair returns to contributions, a measure that
usually hits those with low wages and thus pensions rather than high earners.
Furthermore this policy has crucial implications that are rarely acknowledged. Measures on
both sides lead to the reduction of consumption, further reducing employment and worsening
the situation due to a vicious cycle between employment and consumption (Figure 3).
Figure 3: The unintended consequences of the dominant policy options and system structure
_ a Disposable Retirees
ae i
wa ~
Consumption
we Ry
Ty
/ \
\ —
\ ao
/ \ a
/ \
/ \
{ | Budget Burden System Balance
| : System ayhens
/
; system Revenue
\ J ( R
\ é vA \
empyes( Oe
Level of
NN Contributio
(TY Eligible Retirees Pension Level
Drawing some first conclusions, one may note the following:
a) As the fiscal balance worsens, the pressure to reduce pension payments will lead to
reduced consumption, leading to loss of employment and further fiscal burden.
b) Attempts to raise contributions may also lead to loss of employment leading to lower
system revenues or reduction of consumption or both.
c) Either of the above set in motion the reinforcing loop between consumption and
employment, further worsening the situation.
d) Any reduction in consumption reduces the GDP, leading to lower tax revenues,
increased fiscal deficit, while at the same time the ratio of budget burden for pension
increases.
e) As the latter worsens the pressure for more measures increases.
Figure 4: A causal-loop diagram of behavior of current PAYG pension systems
Budget burden
t
Contributions \ Bi é \
8, , \
fe ‘System Balance + _ Retirees
F ]
rs . | ]
» System revenue
System Expenses < J
» Employed — sl
Nees Die cos ee
The structure of the system itself produces “solutions” that — in the current conditions of
recession and technological unemployment — worsen the situation despite any inverse
intentions. There is an urgent need to question the structural foundations of the pension
system.
3. Time for a lean view
Our analysis sets out from a radically different point of departure. In reality, the pension
system is a parallel tax system, with limited redistributive or other progressive function
(which, in insurance-like systems, is actually the result of corrective ad hoc interventions). It
raises total income taxing for wage earners, especially at the lower end of the income
spectrum. As a result highly paid employees should have the highest pensions, although they
would be the least likely to need them. Most of the operations characterizing modern pension
systems are necessary for the management of collection of inputs and the control of output
so that it is not distributed to those excluded or distributed in analogy to working income (and
contributions). Resources are also needed for policing against contribution dodging.
People, businesses and governments spend too much time and resources dealing with the
processes and intricate complexities — which grow exponentially over time — in order to
manage, contribute according to their obligations or receive their dues. All these processes
contribute absolutely no value to the end product of the system, i.e. the pension of the
retirees. Any executive with minimum exposure to the ideas and principles of lean
management should be able to make this simple observation (Womack and Jones, 2003).
Furthermore, the structure of the system(s) sets in motion socio-political processes that exert
pressures for higher pensions and lower contributions (Overbye 1994, 1997), without allowing
the considerations of boarder fiscal, economic and inter-generational issues at times of
growth.
The next stage that should follow would be to look at the structures that result in the waste
of so much energy and effort without any of the expected results. This would require a broader
holistic view, looking at the whole context, rather than focusing at the operational
management of a given pension system (in contrast to the fallacy of “insulating” the pension
system from the rest of the economy; Tinios, 2010, p.54). A first step would be to question
the necessity of the system itself and its components. There is the obvious issue of economic
performance, not just in terms of managing the available assets, but also in terms of overall
return to society. The fact that pension funds operate as accumulations of capital carries risks
accompanying their management and, at the same time, it makes them part of the overall
mechanism of over-accumulation contributing to the systemic risk inherent to the capitalist
system’.
An alternative view could start from questioning the foundations of the pension system as it
stands today. Here we explore this perspective. A universal pension system, available to all
citizens fulfilling age criteria irrespective of gender and time in - formal - employment, should
be more efficient while providing pensions sufficient for wholesome living. There is a notable
exception to the global trends characterizing pension systems that is close to the model
explored here. New Zealand has been moving consistently since the early days of its pension
system towards a universal flat-rate, tax-funded pension system with significant results°.
During the evolution of the political game
“the changing governments of New Zealand -intentionally or by default - have
provided the elderly poor with strong alliance partners in their quest for a high flat-rate
basic pension, by providing large sections of the middle class, as well as the working
class, with an increasingly strong vested interest in the maintenance of a high flat-rate
basic pension”. (Overbye, 1997)
It might also be argued that the societies characterized by low income disparities (between
low and high incomes) would be favorable towards such a system. Figure 5 outlines the
combined operation of the tax and pension system and how it could be combined in one
unified system. In the next sections we describe the dynamics of the introduction of a flat-rate
tax-based pension system, present a system dynamics model and the results for a case study.
4 “Pension fund assets in OECD countries hit a record USD 20.1 trillion in 2011 but return on investment fell
below zero, with an average negative return of -1.7%”, (http://www.oecd.org/daf/fin/private-
pensions/pensionmarketsinfocus.htm),
“The OECD weighted average asset-to-GDP ratio for pension funds increased from 67.3% of GDP in 2001
to 72.4% of GDP in 2011, with the Netherlands achieving the highest ratio at 138%” (OECD, 2012).
5 Public pension spending is 4.3% of GDP (compared with 7% OECD average and 11.9% in Greece) and the net-of-
tax pension rate is 66% of the net-of-tax earnings (OECD 2011).
Figure 5: Towards a LEAN ‘ion of the Tax and Pension System
Social
Security
Contributions
Income and
Consumption Pension “Investment”
Taxes Funds in Stocks &
Bonds
Corporate
Profit Taxes
Operational
State Budget Pensions Costs
Corporate &
Professional
Profits
Income and
Corporate
’ Consumption
Profit Taxes
Taxes
State Budget Pensions
4. The dynamics of the introduction of a lean universal pension system
The dynamics of this system are set in motion by two levers initiated established by the new
system examined. First (Figure 6a), the abolition of contributions will result in an immediate
negative (balancing) impact on system balance, and a set of positive effects on system balance
as the rise in wages and the increase in employment will result in increased consumption
leading in higher tax collection; the most important lasting effect is the reinforcing loop
between employment and consumption. Second, (Figure 6b) the universal provision of
pensions has a negative impact on system balance, but sets in motion the same positive
impact and reinforcing feedback loop through consumption and employment as in the
previous case. Thus, the issue at hand is to explore the dynamic behavior of the system where
the three loops operate contemporaneously.
Figure 6a: The di ics initiated by the abolition of contrib
Abolished
contributions
B
R ‘ +
\ +
7 ¥ Wages
Sah Employment Consumption
Balance
+
R R )
> <a
+
"
Taxes
(direct & indirect)
+
Figure 6b: The dynamics initiated by pension provision
+
Benefit level
Employment
Consumption
re
Pension
payments
} -
‘
_
Taxes
(direct & indirect)
“system
B Balance Ms
+
Pensioners
In the next section we describe a system dynamics model of this approach to pension policy.
5. The system dynamics model of a lean universal pension system
The model resulting from the approach described above consists of two main subsystems®:
the first (Figure 7a) describes the fiscal flows resulting from the changes in income and
consumption caused from the new pension policy; the second (Figure 7b) depicts the impact
of the new system on employment.
The aim is to study the dynamic that determines the balance of pension related flows. The
balance will be negative and will result in an extra burden for the government budget, a
political issue in itself as it concerns the degree to which (direct) taxation would operate ina
progressive fashion, redistributing wealth. The important aspect of calculation in this part of
the model is that we need to account only for the marginal effect that variations of the
proposed alternative policy will have on the various components of consumption and income,
before calculating their effect on budget revenue and employment.
A steady state of economic affairs is assumed, so recession or high growth effects are omitted
for the sake of comparison (although a relevant feature is built into the model for future
exploration), with initial conditions set at January 1** 2016.
Retirement occurs at a certain age according to policy scenarios: the rate of retirement is the
algebraic sum of entry to employment at the age of 20 and cumulative deaths occurring in the
period in-between. If retirement age is reduced the total number of pensioners will increase.
So, there may be a trade-off between age of retirement, employment and pension benefit
level, for policy and society to consider.
© The system dynamics model was developed with the Powersim simulation environment.
system aivident
Net Wage
Current Av Nominal
Wage
Figure 7. System dynamic model of a universal pension system
system Divident
Paley
New or Old System
Change in current
‘wage income
wa
Te
/ an
seeoaearsan Ty 3
88 Annual 88
a
Income Tax
ome taxes
isposable wage
‘new wage iome
Disposable Income
Monthiy Pension
men
f4cension Payments
Consumption
tendency
bby
Consumption
a: fiscal impact
=
oer
a
ating Age
SO
b: impact on employment
5.1. Sharing the change dividend
NZ
‘Av Consumption Tax
Earnings Tax
Net Earnings on Sales
tS
a)
(lagna
As it becomes evident from the model there is the issue of managing the dividend arising from
the dissolution of pension contributions (employee and employers). There are two obvious
options: increasing wages, with obvious impact on consumption and the countries trade
balance, and reducing labor cost, by not sharing the benefits to workers (with questionable
impact on prices or profit tax collection). A third radical option would be to use the dividend
in order to reduce working time in order to increase employment. This would not raise labour
costs for firms, but would most probably result in productivity increases. Some types of
employment would not be affected as much, i.e. self-employed and public sector (where one
might assume there is significant scope for re-engineering and digitalization)’.
7 A detailed discussion goes beyond the scope of this paper. Here we will assume that most of public sector
employment will not be affected. With respect to self-employed most will be affected, as they are currently
forced to appear as such because the form of employment and social insurance legislation discourages direct
wage contracts.
Here we examine a mix of the first and third options, i.e. part of the remaining contributions
are directed to the generation of new employment through working time reduction and part
to real wage increase.
Thus, if for a wage W, employee contributions are WC and employer contributions are EC,
then®:
- Real wage will be RW=W-WC=W*(1-WC)
- Real labour cost will be RL=W+EC=W*(1+EC)
Also, if working time reduction is X, then, in order not to increase labour cost the new wage
should be:
= NW=RL/(1-X)=W*(1+EC)/(1-X)
Currently in Greece the contribution rates are as follows: WC=13% and EC=26%
approximately. Thus, NW=W*1,26/(1-X) and NW-RW=-0,87+1,26/(1-X)
Here the scenario examined assumes a 25% reduction in working time (30 hour week, against
the current status (40 hour week).?
5.2 Model Equations
The main equations for the above model are as follows:
System Balance:
Retirement System Balance =
J (Consumption and Profit Taxes + Extra Income Taxes - Pension Payments)
Taxes (pensions are assumed to bear no income tax):
Consumption and Profit Taxes =
(Consumption * Average Consumption Tax Rate) + (Consumption * Net Earnings on Sales *
Corporate Earnings Tax Rate)
Extra Income Taxes = Income Tax Rate * Extra Wage Income
Income and Consumption:
Consumption= d(Disposable income * Consumption tendency)/dt
Disposable income =
J(Pension Payments + Extra Wage Income + Change in current wage income — Consumption)
Extra Wage Income = Extra Employed * New Wage
Change in current wage income = d(Employed * (New Wage - Average Wage * 0,87))/dt
Pension Payments = Retired * Social Pension * Income criterion ratio
8 Estimations were made according to the contributions estimated by the major social insurance organization
“IKA” (http://www. ika.gr/gr/i i ance/charge.cfm)
It would probably be more realistic to assume that new employment would occur at lower than current wage
levels. This would result in actual reduction in total labour cost (e.g. if new employees would be paid 20% lower
in average this would result in 5% total labour cost reduction). This assumption is not explicitly examined in the
scenarios presented below, as it falls within the more general scope of lower wage/income level.
Employment:
Extra Employed = (Employment from growth + New system employment)
Employment from growth = Employed * Growth rate * Growth effect on employment
New system employment =
New Employment from pension tax restructuring + Extra New Employment
New Employment from pension tax restructuring =
d(Employed *'% of employment affected * pension tax share to employment)/dt
Extra New Employment =
(Consumption - Extra consumption prev year) * (1-Av consumption tax) * Labor per M€ / IME
6. Simulation Results
The model was run on data from the Greek economy. The Greek pension system is extremely
fragmented, with a wide variety of pension types and contributions, and extremely wide gaps
between high and low pensioners. Most people above retirement age receive no or very small
pensions, below the minimum wage. The simulation runs for the period from 2013 until 2049,
when the demographic trend reaches the peak of rising share of aged citizens (according to
Eurostat projections)?°.
The basic assumptions for the model are shown in Table 1. The key policy variables, for the
base run, are shown in Table 2. Results for different scenarios are shown in Figures 8, 9 and
10.
Table 1. Si ‘ion Model A
Income tax" 15%
Average Consumption Tax 15%
Corporate Earnings tax 20%
Current average wage
1000 Euros/month
Eligibility ratio
90%
Labor per M€
20 people per 1ME
Consumption tendency
90%
Growth rate 1%
Growth effect on employment 50%
% of employment affected (by working time reduction)? 60%
Consumption multiplier 1,2
Table 2. Base run policy variables
Social Pension 800€/month
Retirement age 65
Working time 30 hrs/week
System dividend share 50-50
1° http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search database ,1st January
population by sex and 5-year age groups [proj_10c2150p]
11 Implicit tax rates were in 2010: Consumption 15,8%, Wage labour 31,3%, Capital 16,5% (European Union 2012)
22 This would assume that there is almost no effect on public employees and most self-employed.
First results (Figure 8) show considerable effect on budget burden. Consistently with a system
change, we observe that performance worsens before it improves considerably, from 3% of
GDP (currently below 190 billion Euros) for retirement at 60 to approximately 6% of GDP for
retirement at 65.
Figure 8: Budget burden for base policy scenario (% of GDP)
-4.00
-6.00
-8.00
-10.00
-12.00
— 800-90%
Probably the most important (given the extent of the current social crisis) result is shown in
Figure 9. There is a significant boost in employment which — also important — is sustained for
the duration of the period examined. The rise in employment is the combined effect of
reduction in working time and rise in aggregated consumption. The effect carries on as more
increased employment (along with the rising numbers of pensioners) feed back into
consumption. There is an obvious trade of between fiscal burden and employment for
different retirement age policies”.
3 the direct effect of lower retirement age on unemployment (which would further reduce
unemployment as would drive more people to retirement) is not depicted here
Figure 9: Effect on employment for base policy scenario
1400000
1200000
1000000
800000
600000
400000
200000
0
ST AARSSRSARRRBSSSTEES ARERR
Ssh st Qe gg gk A oo PM a OS Ot in dy i
ee eR eh See eee eee eee TT ee TEES
eo a a a ee a oe a eee a)
aw ata THe AMA ae AMAA ATH AAMAS
== 800-90% no early == 800-90% ——=40hrs —<=Growth 0%
=== Growth 2% ——= 700 —_——= 1000 mee AvWage 1100
——=cons tend 100% retire 67
—cons mult 1.0 —=cons mult 1.5
In order to comprehend the behavior of the system we should look at some other indices.
First, we observe (Figure 10) that pensions keep rising as a share of GDP™, after a short but
rather sharp reduction due to the restructuring of the pension system (the issue of the
transition management is not discussed here, as it is beyond the scope of this paper).
Figure 10: Pensions % of GDP
18
17
16
15
14
2B
12
11
10
—60 ——$61 ——=$62 ——=$ 63 ——=$ 64 ——65
———
—
SSSSCueeesnseseseeseeeanzeee
a a a i
eeeee eee eee eee tee Eee ee ee
SS§SS558 855 SSS SASES SSIES SS SS
However, as we saw in Figure 8, budget burden is reduced considerably, before it rises again
and then follows the demographic trend at a sustainable level. This happens because the net
budget share in pension payments is actually reduced to around 50% (Figure 11).
+4 zero growth is assumed here.
Figure 11: Budget burden % Pension Budget
m0 me m2 3 OE 65
100
“iN
mail
“TN
60
50 5
40 |
BO a ot
MROAMHR DAMHEAE DAMHE DAMNED
soe gy ggg gag ane sy 7 FT FO H oy
e€e¢c cece ee ec ec eee &€ ee eee ee ece
Sssegegeeesesesegegesegegegegsesgssgssgsggs
This reduction may be attributed to the rise of consumption generated by the introduction of
the new system (Figure 12) which is well above the level of pension payments (as shown in
Figure 13 for retirement at 60 and 65). This in turn generates more consumption, profit and
income taxes (the last because of higher employment).
Figure 12: Extra i d
mee 60 eG G2 3 4 5
90,000,000,000
80,000,000,000
70,000,000,000 + ZEE_—<$£_ —
60,000,000,000 +
50,000,000,000 +
40,000,000,000
30,000,000,000 i
20,000,000,000
Jan-.
Jan-.
Jan-..
Jan-,
Jan-,
Jan-,
Jan-..
Jan-
Jan-.
Jan-..
Jan-.
Jan-.
As shown in Figure 13, extra consumption generated by the transition to the new universal
system rises to more than twice the total pension payment forecasted. Thus, the system
generates tax revenue for the budget well above the gap created from the abolition of pension
funds.
Figure 13: Pension and extra ion g d
= Pension Payments - 60 ———= Consumption - 60
= = = Pension Payments - 65 === Consumption - 65
90,000,000,000
80,000,000,000 sseeescet
70,000,000,000 oo= eas
60,000,000,000 =
50,000,000,000
40,000,000,000 a =z
30,000,000,000 sos*
20,000,000,000
10,000,000,000
ie}
+N om © OD ANH OD He tT Rh OM DO
= fo AAA KN DO HO Mm DH HD
sess 8 8 S Ssssssseess
S& s§ S§ KR dN kt Ke KR KR KRKAKA KR GA
<ssssssgsgsgsgsssssgs
sScegsegegesggggggggeggg
aoa a ae a eG a a ea a ae a aa a
Finally, we may explore the trade-off between pension payments and retirement age. As we
see in Figure 14 a 10% reduction in pension benefit would be equivalent to a two year
decrease of retirement age for more than 20 years.
Figure 14: Impact of change pension benefit budget burden
65-10800 65-12000 63-12000 ——=— 63-10800
24000000000 €/yr
22000000000 €/yr
20000000000 €/yr
18000000000 €/yr
16000000000 €/yr
14000000000 €/yr
12000000000 €/yr
10000000000 €/yr
8000000000 €/yr
ANAdrRenReadrmnnanreyrarpnera
PUPA IPERS SS PP FETS HHS |
ee ae a a a a a a a a a a
SSIS AGs SS F888 sg 88 8 8A 8S
However, it would have the opposite effect on the generation of extra employment, as shown
in Figure 15 below.
Figure 14: Impact of change pension benefit budget burden
——— 65-10800
65-12000 === 63-10800 —_63-12000
2300000
2100000 aie TS
1900000
1700000
1500000
1300000
1100000
900000
700000
ARadmeneaeremenrnadeuerbeaunenanea
st Sed. gt GE GE GN Gn Ge Sep cep: en OS ON OF OF OF le ub i
eeee eee eee eee et ett ee eee
SAGAS SHEE eARRASE ETE SE SS
7. Conclusion
The approach examined in this paper has taken the opposite direction vis-a-vis dominant
debate. Instead of attempting to resolve the issues within the structure of the existing system
(a mix of insurance-like structure and state funding), the alternative examined here is a tax-
funded, universal pension system with the requirement of a means test. The analysis set two
broad performance dimensions:
e fiscal impact: the budget burden generated by the new system, and
e social impact: pensioners welfare and impact on employment
A system dynamics model was built on the basis of the Greek case. An important by-product
of this shift in policy would also be a simple model, easy to comprehend. A simplified
retirement policy framework offers obvious opportunities for reflection. Consequently it
would be highly appropriate as a tool for dialogue and participative decision making, a
condition extremely necessary in view of our aging societies.
The results from the simulation runs showed that the alternative pension system examined
may have considerable positive fiscal impact (reducing budget burden up to nearly 4% of
GDP). On the social front, the change should improve the income of the vast majority of
pensioners, in comparison to the current situation, with the possible exception of high
pensioners (whom a transition could be negotiated with). The most significant, and probably
not anticipated, gain would be on employment. The choice to allocate the dividend - which
results from the abolition of contributions — to labor instead of other alternatives (e.g.
employer profits to be taxed), makes possible wider changes: while there is a rise in net wage
income, the most important result is the significant reduction of working time to 30 hours per
week, which in turn leads to a massive rise in employment. The model constructed allows for
a period of adjustment that should prove sufficient to business organizations.
Ona more philosophical level, the change examined is linked to changes in values about work,
inter-generational solidarity and social rights. It is compatible with a policy of minimum
income as it provides a dignified income for pensioners (above basic salary) and at the same
time liberates resources for provision of social benefits and support for younger ages (this
includes not only the saving estimated from pension provision but also the result of lower
needs for unemployment benefits and income support due to the attainment of high
employment levels).
This model may be expanded in order to address issues relating to the interplay of working
time with retirement age and employment, and between retirement age and pension benefit
(i.e. pensioners would be allowed to decide their age of retirement knowing the expected
impact on their pension. Another avenue of exploration could be the impact on employment
dynamics: as employment conditions would be considerably improved, Greece could be an
attractive place to work and live, attracting young people from other European countries, as
well as business.
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