A Theory of Contribution Density and Implications for Pension Design
The adequacy of contributory pensions for the middle classes depends on density of contribution. Density can be far below 100% because the State is unable or unwilling to impose the mandate to contribute on all jobs, especially on poor workers such...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/07/20170243/theory-contribution-density-implications-pension-design http://hdl.handle.net/10986/20198 |
| Summary: | The adequacy of contributory pensions
for the middle classes depends on density of contribution.
Density can be far below 100% because the State is unable or
unwilling to impose the mandate to contribute on all jobs,
especially on poor workers such as many in self-employment
and small firms. The paper presents a model where
individuals choose whether to bundle saving for old age in a
covered job or to save independently while choosing an
uncovered job. The determinants of the effective rate of
return offered by the contributory pension plan include the
earnings differential. This return is then compared with the
returns offered by pure saving in the financial market, to
determine the equilibrium density of contribution. The paper
also applies the model to assess two standard designs for
noncontributory subsidies for the old poor. It finds that
these standard designs crowd out contributory pensions for
the middle classes by reducing density. The paper also
considers two second-generation designs for noncontributory
subsidies and other approaches to raise density. This model
also allows optimization of the combined multipillar
structure, where participants get noncontributory pensions
and also contributory pensions based on both mandates and
fiscal incentives. |
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