Longevity, Annuities and the Political Support for Public Pensions

40 Pages Posted: 19 Jul 2011

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: May 1, 2011

Abstract

We develop a model where individuals differ in productivity and in longevity. Benefits from the public pay-as-you-go pension system take the form of a collective annuity, with both a contributive (Bismarckian) component (based on the worker’s past earnings) and a flat (Beveridgean) part. Voters choose the size (generosity) of the system and its degree of income redistribution (or type). While individual longevity does not affect preferences for type and size of the program, these are influenced by both the average longevity and by the correlation between longevity and productivity. When the size of the annuity program is chosen by majority voting for a given type, we obtain that the size of the Beveridgean scheme decreases smoothly with increases in average longevity, while the support for a Bismarckian pension abruptly drops to zero once a threshold is crossed. When both size and type are determined by majority voting, we obtain either large and mostly Bismarckian systems or smaller Beveridgean systems, as is empirically observed. Also, a larger correlation between longevity and productivity makes the collective annuity more redistributive, although sometimes at the expense of its size.

Keywords: generosity, redistributiveness, pay-as-you-go pensions, collective annuity, longevity, shepsle structure-induced equilibrium

JEL Classification: D78, H55

Suggested Citation

Cremer, Helmuth and De Donder, Philippe, Longevity, Annuities and the Political Support for Public Pensions (May 1, 2011). Netspar Discussion Paper No. 05/2011-063, Available at SSRN: https://ssrn.com/abstract=1889076 or http://dx.doi.org/10.2139/ssrn.1889076

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Philippe De Donder (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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