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Economics of the welfare state

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Economics of the welfare state

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Economics of the welfare state

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

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Economics of the welfare state

Authors: Róbert Gál, Márton Medgyesi Supervised by: Róbert Gál

June 2011

ELTE Faculty of Social Sciences, Department of Economics

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Economics of the welfare state

Week 13

Statistical indicators of lifecycle financing

Róbert Gál, Márton Medgyesi

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Topics

Statistical indicators of lifecycle financing in a 4-way table

Indicators: cross-sectional; based on remaining lifetime and on entire lifetime

Indicators of sustainability and redistribution Implicit investments and debt

Generational accounting

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Statistical indicators of lifecycle financing in a 4-way table

cross-section

cohort population cohort population

gross net gross net gross net gross net total economic

activities

remaining lifetime entire lifetime

GDP/NNI

general government specific programs

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Example of cross-sectional indicators: Lee-arrows

Lee-arrows represent the difference between the

average age of workers and consumers (distance

of the sole and head of the arrow) and the magnitude of the reallocation (area of

arrow).

Source: Lee, RD (2010): National Transfers Accounts. Concepts and Theories. Presentation at the 7th NTA conference, Honolulu.

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Example of indicators of remaining lifetime: net pension liabilities

Example of indicators of total lifetime: net transfer rate (Swedish data)

Source: Stahlberg (1990).

year of birth of cohort benefit/tax ratio net transfer rate

1905–1914 5,9 0,02

1915–1923 3,7 0,04

1924–1933 2,0 0,04

1934–1943 1,2 0,01

1944–1950 0,8 –0,02

1964–1970 0,8 –0,02

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cross-section

cohort population cohort population

gross pension wealth,

contribution wealth

net net pension wealth;

net present value

implicit pension debt, implicit health reserves, implicit education reserves gross

net generational

imbalance, sustainability gap

net transfer rate

gross

net directions of net flows;

time series of average ages; lifecycle-adjusted population dependency ratio

consumption deficit life-cycle wealth

gross

net full cohort net

present value total economic

activities

(GDP+household

remaining lifetime entire lifetime

GDP/NNI

general government specific programs

Further indicators in the 4-way table

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Types of indicators:

weighted averages

net values (net pension wealth; implicit pension debt; etc) ratios (benefit/tax ratio; rate of return; net transfer rate; etc.)

balancing items (payback period; sustainability gap; implicit rate of return; consumption deficit; etc)

Applications

cross-section: macroeconomics

remaining lifetime indicators: sustainability (within limits: crude implicit pension debt is not a sustainability measure) entire lifetime indicators: redistribution, fairness, intergenerational constitution

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Some further important indicators

Public debt in selected East-European countries (% of GDP, 1999–2000)

(Source: Holzmann, Palacios and Zvinienie, 2004)

explicit implicit (r=5)

Croatia 33 175

Estonia 7 163

Hungary 59 171

Lithuania 28 134

Macedonia 41 244

Malta 56 194

Moldova 78 136

Poland 43 220

Portugal 55 193

Romania 18 214

Slovakia 31 179

Slovenia 25 255

Ukraine 59 220

Implicit debt

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1. 3 definitions of implicit debt (Holzmann, Palacios and Zviniene 2004)

– accrued-to-date liabilities (accrued termination liabilities)

– projected liabilities of current workers and pensioners (present value of anticipated benefit payments to

current participants)

– open-system liabilities (“ongoing concern” liabilities) 2. Trade off between explicit and implicit debt

3. Reduction of implicit debt

4. Normal and outstanding implicit debt

Some notes on the implicit debt

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IPD2 in the Hungarian pension system 1992-2008

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 50 100 150 200 250 300 350 400

2009-es áron, md Ft (bal tengely) GDP %-ában (jobb tengely)

Source: Gál (2011)

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IPD3 in the Hungarian pension system 1992– 2008

-10 000 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-50 0 50 100 150 200 250 300 350 400

2009-es áron, md Ft (bal tengely) GDP %-ában (jobb tengely)

Source: own calculation.

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Implicit pension debt, implicit health debt, implicit LTC debt

Implicit health investments, implicit education

investments

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The method of generational accounting (Auerbach, Gokhale and Kotlikoff,1991) in 6 steps

1st step: separation of private and public goods (items traceable and not traceable to payer or receiver;

(M-items and G-items, respectively)

M-items and G-items of the government budget balance:

Government revenues Government expenditures

Gb1 Gk1

Gb2 Gk2

Gbn Gkn

Mb1 Mk1

Mb2 Mk2

Mbm Mkm

ΣGb + ΣMb ΣGk + ΣMk

Generational imbalance

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2a. step: Decomposition of M-scalars to age profile vectors:

Example: personal income tax revenues in 2007: HUF 1.817 billion

Age profile of personal income tax payments (per capita averages) in 2007

Source: Gál, Nagy és Vargha (2009)

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Age profile of aggregate revenues

(per capita averages) in 2007

2b. step: Decomposition of M items (scalars) in the balance to age profile vectors

Source: Gál, Nagy és Vargha (2009)

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Aggregate net tax profile, 2001

2c. step: Decomposition of the balance of M items (scalar) to age profile vectors

Source: Gál, Nagy és Vargha (2009)

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3rd step: Projection of the net tax age-profile

(vector): projection matrix

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Intertemporal budget constraint

(Auerbach, Gokhale and Kotlikoff, 1991)

4th step: Diagonal aggregation: generational account (vector)

on the basis of projection matrix

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Generational accounts, Hungary, 2001

(generational account: present value of net taxes in the remaining lifetime of the representative individual of a cohort)

Generational imbalance: difference between the accounts of the new born and future generations if total deficit is payable by the latter.

Source: Gál, Törzsök, Medgyesi and Révész (2005)

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Generational accounts and the relative generational imbalance in selected

countries in 1995, in thousand dollars, at exchange rate

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Generational accounts and the relative generational imbalance in selected

countries in 1995, in thousand dollars, Kotlikoff-Leibfritz scale

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ELTE Faculty of Social Sciences, Department of Economics

Thank You for using this teaching material.

We welcome any questions, critical notes or comments we can use to improve it.

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