硏究簡報:「積錢防老」以應付人口老化? (只有英文版)

 在 社福勞工, 退休制度
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Research brief on pension systems – 1: Coping with the problem of population ageing through saving for tomorrow?

 

From the perspective of an individual, it is intuitively true that saving up for one’s retirement should help avoid reliance and being a financial burden on one’s children while in old age. From this general truism about an individual, many infer that collectively, a society can also avoid imposing too much financial burden on its future generations if its current generation saves enough for their retirement.

 

If this inference is correct, then it clearly opens possibilities for coping with the problem of population ageing – the problem of a decreasing number of workers having to support an increasing number of retirees. An ageing society can tackle the problem by requiring its current generation to save up enough while still young for their own retirement. In terms of pension system design, the inference leads many policy-makers and economists, including the World Bank, to believe that funded schemes are more effective in dealing with demographic shock than PAYG (pay-as-you-go) schemes. On the merit of funded pension schemes, Estelle James of the World Bank writes: “Some degree of prefunding is desirable in an old age security system. This helps to insulate the system from demographic shock … .”1 James is also of the view that many policy-makers and economists largely agree on this point.

 

Collectively, and at the level of the whole economy, however, things do not work the way they do as at the level of an individual. Nicholas Barr, an economist at LSE, points out that the inference above commits the fallacy of composition – a fallacy which assumes that “because something is true for an individual it will necessarily be true on aggregate.”2 In another context, Barr dismisses the view that funded schemes can resolve adverse demographics as a myth in the policy debate on pensions and a misleading guide to policy.3

 

The fallacy becomes apparent and the myth can be readily debunked once the following facts are understood.4

  • A society’s output is produced by its working population and not by retirees. This means that the consumption of retirees is produced entirely by the working population. For a given level of output, in aggregate, retirees’ consumption cannot be increased without a corresponding decrease in the consumption of the working population.
  • Population ageing means a decline in the workforce. Unless productivity grows, the underlying problem of population ageing is a fall in output or production.
  • Savings, either in the form of piles of money or in the form of financial assets, are claims or purchasing power over future production. People are not interested in money or financial assets but in consumption, such as goods and services (i.e. what the money can buy). What matters to people therefore is not the savings they own but whether the production after they have retired is sufficient to meet their desired level of consumption. Money is irrelevant unless there are sufficient goods and services for retirees to buy!

 

In an ageing society, because of a decline in the workforce, unless its productivity grows, its output will fall. In the goods market, less will be available for purchase by both retirees and workers. Retirees can only consume at the level they desire if workers reduce their consumption. If the desired consumption level of both retirees and workers remain unchanged, demand will exceed supply in the goods market. This will cause price inflation and erode the purchasing power of retirees’ savings (as well as workers’ earnings). In the end, the retirees will be unable to consume what they have saved up for in their retirement.

 

Falling output also affects retirees’ desired level of consumption through the assets market. Falling output means that the aggregate demand of financial assets by workers decreases unless the workers increase their desired level of savings. For retirees, if some of their savings are in the form of financial assets, to finance their consumption in retirement, they must sell their assets in the assets market. It is very likely that retirees’ desired asset sales will exceed desired asset purchases by workers. Excess supply in the assets market thus reduces assets prices and hence retirees’ purchasing power. Again, the retirees will be unable to consume what they have saved up for in their retirement.

 

It is important to note that for retirees with relatively low levels of savings, owing to price inflation and asset deflation, they may eventually need to count on the support of the working population through some form of income transfer to maintain an acceptable level of consumption.

 

The analysis above is highly simplified and is based on a closed economy. Rendering the analysis more precise and extending it to an open economy nonetheless does not change the result or the underlying logic.5

 

A number of conclusions follow:

  • “In the face of demographic problems, the key variable is output.”6
  • Population ageing is a problem only if it causes a fall in output; the problem is solved to the extent that falling output can be prevented.7
  • If population ageing does not cause a fall in output in aggregate, the output should be able to meet the combined consumption of workers and retirees. The issue of providing economic security to retirees then becomes one of distribution – the issue of how to divide the output between retirees and workers.
  • To deal with the problem of population ageing, an entire menu of policies which promote output growth should be considered directly. The policy options include:
    • more and better capital equipment
    • improving labour through more education and training
    • increasing labour supply, for example, married women by offering better child-care facilities
    • raising the retirement age  
    • importing labour directly
    • importing labour indirectly by exporting capital to countries with a young labour force8
  • From a macroeconomic perspective, the choice between funded pensions schemes and PAYG schemes is secondary. The argument that funded schemes insulate retirees from adverse demographic change should not be overstated. From an economic point of view, demographic change is not a strong argument for adopting funded pension schemes.9
  • The choice between funded schemes and PAYG schemes in the face of demographic change is relevant only to the extent that funded schemes cause output to be higher. This is however a matter of considerable controversy both theoretically and empirically.10

 

 

Prepared by Winston Ng ()

Hong Kong Democratic Foundation (香港民主促進會)

9 March 2012

 

 


Endnotes:

1 Estelle James. 2001., p. 63.

Nicholas Barr. 2004., p. 194.

Nicholas Barr. 2000., pp. 8-9.

4 The following analysis is based on Nicholas Barr. 2000, 2002, 2004 and Nicholas Barr and Peter Diamond. 2008.

5 For a more precise analysis, see Nicholas Barr. 1979.

6 Nicholas Barr. 2000., p. 11.

7 Nicholas Barr. 2004., p. 198.

8 Nicholas Barr. 2000., p. 10.

9 Ibid., p. 11.

10 Nicholas Barr. 2004., p. 198.

 


References:

Barr, Nicholas. 2004. Economics of the Welfare State. 4th ed. Oxford: Oxford University Press.

Barr, Nicholas. 2002. Reforming Pensions: Myths, Truths, and Policy Choices. International Social Security Review 55(2): 3-36.

Barr, Nicholas. 2000. Reforming Pensions: Myths, Truths, and Policy Choices. (IMF Working Paper WP/00/139). Washington, DC: International Monetary Fund.

Barr, Nicholas.1979. Myths my grandpa taught me. Three Banks Review 124(Dec.): 27-55.

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

Barr, Nicholas and Diamond, Peter. 2009b. Pension Reform: A Short Guide. Oxford: Oxford University Press.

Barr, Nicholas and Diamond, Peter. 2008. Reforming Pensions: Principles and Policy Choice. Oxford: Oxford University Press.

Gillion, Colin. 2000. The development and reform of social security pensions: the approach of the International Labour Office. International Social Security Review 53(1): 35-63.

Holzmann, Robert. 2000. The World Bank approach to pension reform. International Social Security Review 53(1): 11-34.

James, Estelle. 2001. Comments on rethinking pension reform: ten myths about social security systems. In R. Holzmann and J. E. Stiglitz with L. Fox, E.James, and P. R. Orszag. Eds. New Ideas About Old Age Security: Toward Sustainable Pension Systems in the 21st Century. Washington, DC: World Bank.

World Bank. 1994. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. New York: Oxford University Press.

 

 

 

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