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Macro Public Finance Lab @ ANU
Micro data and macro models for better economic policy

Retirement Financing

Papers

  1. Retirement Financing with Private Pension and Housing Assets
  2. Sustainable and Equitable Pensions with Means Testing in Aging Economies
  3. Facing Demographic Challenges: Pension Cuts or Tax Hikes

Retirement Financing with Private Pension and Housing Assets

George Kudrna, Chung Tran and Alan Woodland  

[Paper] [Slides]

We study optimal retirement financing using a stochastic, overlapping generations (OLG) model with tenure choice, stochastic labour earnings and elastic labour that distinguishes three sources of household wealth: housing, liquid financial and illiquid private pension assets.

Sustainable and Equitable Pensions with Means Testing in Aging Economies

George Kudrna, Chung Tran and Alan Woodland  

EUROPEAN ECONOMIC REVIEW, VOLUME 23, PAGES 103947 | JANUARY 2022

[Publication] [Paper] [Slides]

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual economic status. In the context of population aging with widening gaps in life expectancies, we show that this feature generates an automatic mechanism that (𝑖) mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and (𝑖𝑖) redistributes pension benefits to those in need with shorter life expectancies (redistributive device). To evaluate this automatic mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse effects of population aging on the fiscal costs and enhancing the progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a sufficiently strong automatic mechanism to keep public pensions sustainable and progressive under population aging.

Facing Demographic Challenges: Pension Cuts or Tax Hikes

George Kudrna, Chung Tran and Alan Woodland  

MACROECONOMIC DYNAMICS, VOLUME 23, PAGES 625-673 | MARCH 2019

[Publication] [Paper] [Slides]

A challenge that faces many advanced economies is how to finance age-related spending programs as the population ages. In this paper, we investigate two policy options—pension cuts and tax hikes—to mitigate fiscal pressure arising in the special context of Australia, whose population is ageing fast while growing substantially in size due to immigration. Using a computable overlapping generations model, we find that while both policy reforms can achieve a similar fiscal goal, they lead to different distributional and welfare effects across income groups over time. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance government spending commitments. Moreover, within the tax hike option, taxing income or consumption results in opposing macroeconomic and welfare effects. Indeed, our opposing intra- and inter-temporal welfare outcomes highlight some political complexity when devising a more sustainable tax-transfer system.