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Reforming pensions: principles, analytical errors and policy directions

Barr, Nicholas and Diamond, Peter (2009) Reforming pensions: principles, analytical errors and policy directions. International Social Security Review, 62 (2). pp. 5-29. ISSN 0020-871X

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Abstract

This article, based on two books (Barr and Diamond 2008, forthcoming), sets out a series of principles for pension design rooted in economic theory: pension systems have multiple objectives, analysis should consider the pension system as a whole, analysis should be framed in a second-best context, different systems share risks differently, and systems have different effects by generation and by gender. That discussion is reinforced by identification of a series of widespread analytical errors – errors that appear in World Bank work, but by no means only in World Bank work: tunnel vision, improper use of first-best analysis, improper use of steady-state analysis, incomplete analysis of implicit pension debt, incomplete analysis of the impact of funding (including excessive focus on financial flows, failure to consider how funding is generated, and improper focus on the type of asset in trust funds), and ignoring distributional effects. The second part of the article considers implications for policy: there is no single best pension design; earlier retirement does little or nothing to reduce unemployment; unsustainable pension promises need to be addressed directly; a move from PAYG towards funding in a mandatory system may or may not be welfare improving; and implementation matters – policy design that exceeds a country’s capacity to implement it is bad policy design. We illustrate the ranges of designs of pension systems that fit the fiscal and institutional capacity constraints typical at different levels of economic development. The potential gains from simplicity imply that a country capable of implementing an administratively demanding plan does not necessarily gain from doing so. New Zealand has a simple pension system through choice, not constraint.

Item Type: Article
Official URL: http://www.wiley.com/bw/journal.asp?ref=0020-871x
Additional Information: © 2009 Nicholas Barr and Peter Diamond
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Sets: Departments > European Institute
Collections > Economists Online
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 04 Sep 2009 08:24
URL: http://eprints.lse.ac.uk/25099/

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