Equitable and Sustainable Pensions
Chapter

Chapter 7. Who Will Pay? The Dynamics of Pension Reform and Intergenerational Equity

Author(s):
Benedict Clements, Frank Eich, and Sanjeev Gupta
Published Date:
March 2014
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Author(s)
Kenichiro Kashiwase and Pietro Rizza 

Introduction

Pension reform is a challenging fiscal issue. With the aging of the population, if pension systems are not reformed, many advanced and emerging market economies face rising public pension spending. Potential measures to secure the long-term sustainability of pension systems include parametric reforms that increase the pensionable age and contribution rate, reduce the income replacement rate, or alter the way benefits are indexed. These reforms, however, can have very different implications for intergenerational equity. In the end, pension reforms require somebody to pay more—so that enough savings are generated over time— either in the form of higher contributions or reduced benefits. The lifetime burden generated by a pension reform varies across generations, and its magnitude depends on the size of the additional burden imposed by that pension reform each year and the number of years during which individuals are subject to the reform. Policymakers concerned with equity considerations should thus be knowledgeable about who would bear the burden of different reforms.

Generational accounting is one approach that can be used to study the generational fairness of policies (Auerbach, Gokhale, and Kotlikoff, 1991). An analysis based on generational accounting usually includes all public sector taxes and expenditures in the computation of the net taxes (i.e., the generational account) that each living person and future generations will have to pay, assuming that current policies remain unchanged in the long term. This approach can be used to evaluate the impact on intergenerational equity of reforms that help close a given fiscal gap. This evaluation usually compares current newborns—the generation born in the current year or the year of a reform—with future newborns— generations born in subsequent years. 1 The different amount of net taxes between newborn and future newborns is meant to quantify the burden to be imposed on future generations, should the adjustment be postponed.

However, this approach does not take into account equity considerations among currently living generations—current retirees and current workers— following a pension reform. If pension benefits are too generous compared with contributions paid during the working life, and if the overall population is aging (common in many advanced economies), the pension system might become unsustainable and will require a parametric reform. Such a reform frequently involves an increase in lifetime net taxes on current workers (either by increasing contributions or by reducing future benefits) while leaving current retirees unaffected. This result, in turn, leads to an increase in disparity between currently living generations.

This chapter adds to the existing generational accounting literature by developing new measures of generational fairness, focusing in particular on currently living generations. The chapter shows how different parametric pension reforms, although ensuring long-term financial sustainability, may induce significant degrees of unfairness among living generations.

The rest of the chapter is organized as follows: The next section provides a brief overview of major pension reforms in the United States, Italy, and Japan during the last half century. Estimates of the generational equity of pension systems in the United States, Italy, and Japan, based on net taxes as a share of lifetime earnings for current retirees and working generations, as well as current and future children, is provided in the third section. The fourth section concludes. The appendix presents an analytical framework with which to study the impact of parametric pension reforms on intergenerational equity across living and future generations.

A Brief History of Pension Reforms in the United States, Italy, and Japan

United States

The U.S. Social Security system was introduced in 1935 when the Social Security Act was signed into law. The program began collecting contributions in 1937, and special trust funds were created for the revenue collected. The system reached maturity in the 1970s. Two major parametric reforms around that time contributed to large increases in spending. First, the government introduced wage indexation of the initial retirement benefit in 1972. Second, a mechanism known as a cost-of-living adjustment (COLA) was introduced in 1975 to protect the value of retirement benefits from inflation. These reforms contributed to large spending increases between 1975 and 1982 and led to the short-term financing crisis in the early 1980s (Martin and Weaver, 2005). To address this issue, the U.S. Congress passed amendments to the Social Security law in 1983 and introduced many significant changes based on the recommendations of the Greenspan Commission. The 1983 amendments set forth a schedule to raise the pension eligibility age in increments from 65 years in 2003 to 67 years in 2025. Workers born in 1938 and thereafter were affected by this change. Among other changes, the law advanced scheduled increases in Social Security tax rates, starting from 1984. At the program’s inception, the Social Security payroll tax rate was only 2 percent. The rate gradually climbed to 12.4 percent during the period 1949–90. In 2013, the rate stood at 12.4 percent for self-employed workers as well as for employees and their employers (who pay 6.2 percent each) combined. 2

Italy

The Italian pay-as-you-go (PAYG) pension system developed gradually. A pension system with limited coverage already existed before the minimum insured period for eligibility was introduced in 1952, when Italy’s PAYG system started taking shape (Brugiavini, 1999; Franco, 2002; Renga, 2010). By 1969, Italy’s PAYG system was fully developed following transition to universal coverage during the 1960s (Martinelli, Chiesi, and Stefanizzi, 1999; Renga, 2010).

Italy introduced two major pension reforms during the 1990s to address rising long-term public debt caused partly by the acute economic slowdown that started in the 1980s (Beltrametti, 1994, 1996; Franco, 2002). The 1992 reform (known as the Amato reform) established the normal retirement age as 65 years for men and 60 years for women, to begin in 2032. Indexation of pension benefits was changed to the cost of living based on the consumer price index, and the reference working period for computing pension benefits was extended. The years of contributions required for pension eligibility were also raised to 20. In 1995, another reform (known as the Dini reform) was approved, which radically changed the shape of the pension system. The reform introduced a notional defined contribution (NDC) system, increased the contribution rate for both employees and the self-employed, and set the normal retirement age in the range of 57–65 years for both men and women. Minimum years of contribution for eligibility were also reduced to five years. The 1995 reform introduced a lengthy transition period in which old (defined benefits) and new (defined contributions) rules applied to different individuals according to the number of years for which they had already contributed to the system. This differential treatment was partly eliminated by the 2011 pension reform, which extended the NDC scheme to all workers. The scheme was applied to the remaining years of work. The 2011 reform also linked the statutory retirement age to life expectancy and temporarily reduced or suspended pension indexation for those receiving the highest benefits.

Japan

In Japan, an employee pension insurance system existed in the 1940s, but it covered only a limited number of people. To extend coverage to the entire population, the country introduced the PAYG National Pension system in 1961. With rapid aging of the population and weak economic growth following the bursting of a financial market bubble in the early 1990s, the system became unsustainable. In response, the government implemented critical reforms in 2000 and 2004 aimed at maintaining the public pension system’s sustainability for the next century. The 2000 reform introduced a gradual increase in the eligibility age for the old-age basic pension. Incremental increases from 60 years to 65 years would take place for the basic pension during 2001–13 for men and 2006–18 for women. 3 The eligibility age for earnings-related pension benefits is also scheduled to rise from 60 to 65 years during 2013–25 for men and 2018–30 for women. The 2000 reform set forth a macroeconomic sliding formula that adjusts the benefit calculation when the pension system is estimated to fall short of financial sustainability any time during the next 100 years. The government’s most recent projection (MHLW, 2010a, 2010b) incorporates this adjustment for 2012–38, gradually reducing the income replacement rate from 62 percent in 2009 to 50 percent in 2038. To further strengthen the long-term sustainability of the pension system, the 2004 reform introduced a gradual increase in the payroll tax from 13.6 percent in 2003 to 18.3 percent in 2017 by an annual increase of 0.354 percentage points. The reform also raised individual contributions to the national pension program, for 2005 through 2020.

Pension Reforms: Impact on net Pension Liabilities and Intergenerational Equity

Net Pension Liabilities

United States

Despite parametric pension reforms, the trust fund surplus in the United States peaked at 18 percent of GDP in 2009 and has since declined. Retirees from the so-called baby boom generation (born between 1946 and 1964) began collecting their retirement benefits in 2008, as the result of which outlays in the Social Security program are projected to rise from 4.2 percent of GDP in 2007 to 6.1 percent in 2037 (CBO, 2011). By that time, the trust fund surplus is projected to be depleted. Even after most baby boom cohorts exit by the mid-2060s, gains in life expectancy will continue to increase pension spending. Subsequently, outlays will rise to 6.4 percent of GDP by 2085 under the Congressional Budget Office’s scheduled benefit scenario (baseline), in which benefits will be paid regardless of the Old-Age and Survivors Insurance and Disability Insurance Trust Fund balances. Given these profiles, the country faces a net pension liability (NPL)—the sum of future primary pension balances and legacy debt—of 63 percent of 2009 GDP. 4 The appendix provides information on this calculation.

Italy

Italy does not have a formal trust fund account for its social security program. Payroll taxes are the main source of funding, and the central government finances any remaining funding gaps from general revenues. The major reforms of 1992 and 1995 involved very long transition periods (Baldacci and Tuzi, 2003). Consequently, the benefits of the reforms were modest in the medium term (Cackley, Moscovitch, and Pfeiffer, 2006). During this transition period, the old-age support ratio will continue to decline, with the ratio projected to reach 1.5 (the historical low) in 2050. Significant reductions in pension spending (relative to the size of the economy) are only expected to take place from 2040 onward (Figure 7.1, panel 3). By the mid-2060s, the primary pension balance is expected to turn to surplus, provided that social security revenue grows in line with projected GDP growth.

Figure 7.1Public Pension Systems: Benefits and Contributions

(Percent of GDP)

Sources: Congressional Budget Office, 2011; Haver Analytics; Italy, National Social Security Institute (Instituto Nazionale Previdenza Sociale); Japan, Social Security Agency, Administration Department; Japan, Ministry of Health, Labor, and Welfare; Japan, Ministry of Internal Affairs and Communications; and authors’ calculations.

1 This figure assumes that pension benefits for public sector employees, managed by the Mutual Aid Associations, are financed by general government revenues. The government subsidy that helps finance 50 percent of the old-age basic pension benefit accounts for about 2 percent of GDP, on average, during 2009–15.

2 Figure does not incorporate the effect of the December 2011 pension reform. Payroll tax revenues are based on official statistics. The figure is based on the assumption that before 1980, the series grew by the rate of nominal gross wages. In 1998, social security contributions declined with the abolition of employers’ compulsory contributions to the health care system as a result of the introduction of the regional production tax (OECD, 2000).

Japan

The primary pension balance in Japan is expected to turn to deficit following the second baby boom generation’s transition to retirement in the mid-2030s. Although the deficit will remain thereafter, the trust fund balance in Japan will be sustained through 2100 5 according to the most recent projections by the Pension Bureau (MHLW, 2010a, 2010b). Unlike the United States, Japan includes future government contributions (from general revenues) in the long-term calculation of this trust fund balance. The 2004 reform raised government contributions so as to finance half of the old-age basic pension benefit payments. If sustained, this contribution would cost the government 2 percent of GDP, on average, during 2009–2100. A prolonged decline in fertility among Japanese women, which has been well below the natural replacement rate, led the population to shrink in 2005 for the first time since World War II. As a result of Japan’s long period of population decline (National Institute of Population and Social Security Research, 2012) the labor force is also expected to contract. Beginning in 2030, pension contributions would grow at a slower pace than the overall economy, while pension spending would grow faster as the second baby boom generation (born in 1971–74) starts retiring. To meet its spending obligations, the government will need to cut deep into the trust fund surplus beginning in 2050. Japan’s long-term NPL over the next 200 years is estimated to be 82 percent of 2009 GDP.

Intergenerational Equity

To underscore the degree of inequity across different generations in these pension systems, this section shows net taxes calculated in two different ways: from an individual perspective (Figure 7.2, panels 1, 3, and 5), and from the cohort’s perspective (Figure 7.2, panels 2, 4, and 6). The individual perspective assumes that a representative agent from each birth cohort (or generation) lives to age 100. The comparison of intergenerational inequity using this perspective is helpful because differences in age-specific mortality rates across generations do not change the results. The cohort’s perspective, in contrast, takes into account the differences in mortality of any given birth cohort over time. Improvements in life expectancy are implicitly captured in the cohort’s perspective.

Figure 7.2Net Tax Paid by Different Generations

(Percent of lifetime earnings)

Sources: Congressional Budget Office; U.S. Social Security Administration; Rizza and Tommasino (2010); Japan Administration Department, Social Insurance Agency; Ministry of Health, Labor and Welfare; Ministry of Internal Affairs and Communications; and authors’ calculations.

Note: All values are discounted for the United States based on the 10-year government bond yields; for Italy based on the assumed long-term real rate of 3 percent plus inflation measured by the GDP deflator; and for Japan based on the nominal yield of seven-year Japanese government bonds. For the individual perspective, a representative from each generation lives through age 100. A positive number indicates that the sum of social security taxes paid is higher than the benefits received over the individual’s life. For the cohort’s perspective, individuals who were born in the same year are considered. Because of natural attrition due to death, the number of individuals who survive to receive benefits is always less than individuals who pay taxes in any given birth cohort.

United States

The Social Security program in the United States paid its first monthly benefits in 1940. The first-ever beneficiary, who was born in 1874, had paid payroll taxes for only three years and collected benefits for 35 years. 6 The first generations of pensioners, as well as current retirees, pay, on average, negative net taxes (Figure 7.2, panels 1 and 2), indicating that lifetime contributions paid to the government are smaller than benefits received from the government. As is the case with other countries that established PAYG pension systems, the legacy costs must be paid by younger generations. The legacy costs in the United States relative to the size of its economy, however, are not as large as in Italy or Japan because retirement benefits were set very low at the program’s inception (SSA, 2005). The burden on younger generations of financing these legacy costs are thus lower in the United States. This partly explains why generational inequity (the gap in net taxes paid) between current retirees and workers is much smaller in the United States than in Italy and Japan (Figure 7.2).

Pension reform in the United States has focused more on the revenue than on the expenditure side. At the program’s inception, the payroll tax rate was 2 percent and increased 10 percentage points by 1990. Much of this adjustment was front-loaded. The payroll tax rate increased to 7¼ percent in the early 1960s. Subsequently, “current retirees” from that time experienced significant increases in net taxes. Individuals born between 1926 and 1929 experienced the largest percentage increase in the tax rate. Additional increases in payroll tax rates after the 1960s have mainly affected current working generations. This impact, however, was mitigated by increases in income replacement rates. For earners of the median wage retiring at age 65, the replacement rates started rising gradually from about 30 percent in 1970 to more than 50 percent in 1982, before declining again to about 42 percent during the 1990s and the first decade of the 2000s (Martin and Weaver, 2005). 7 The combination of these parametric pension reforms helped contain increases in generational inequity between the currently retired and working generations.

Indeed, generational inequity is low between current retirees, workers, children, and future newborns, from both the individual and the cohort’s perspectives. An incremental increase (two months) in full retirement age during 2003–2025, which eventually raises the retirement age from 65 years to 67 years, has already started affecting the retirement decisions of cohorts born in 1938 and later. As a result of this change, the full retirement age will be 67 for generations born in 1960 and later. The gradual increase in the retirement age mitigates the size of the increase in net taxes for any given generation relative to its counterparts who were born immediately after or before.

Italy

By contrast, the public pension system in Italy shows substantial intergenerational inequity, both from the individual and the cohort’s perspectives, indicating that the treatment of current retirees, current working generations, children, and future generations differs significantly. Those differences are mostly due to the effects of the long transition periods of the 1990s reforms. The scheme for computing pension benefits remained unchanged for workers who had already contributed to the previous defined-benefit scheme for at least 18 years at the time of the 1995 reform. Workers who had already entered the labor market but had contributed for fewer than 18 years were to receive pension benefits calculated as a mix of the two schemes—the defined-benefit scheme and the NDC scheme—weighted in proportion to the number of working years before and after 1995. Those most likely to be affected were born between the 1960s and the 1970s. Hence, the retired generations in 2010 will continue receiving pension benefits under the old defined-benefit scheme, which is among the most generous programs in the advanced economies (Capretta, 2007). Net taxes for these generations are the lowest. By contrast, the current working generations face far less generous pension benefits, creating substantial generational inequity between these two groups. Generations who were born in the1980s and thereafter will receive even smaller benefits, on average, under the full NDC scheme, creating further generational inequity for “children” against “retirees” as well as “workers” 8 (Figure 7.2, panels 3 and 4).

This inequitable treatment has been partly offset by the reform approved in December 2011, which established that the NDC scheme would apply to all workers for all remaining years of contributions, regardless of when they entered the labor market. However, this change affects a very limited number of people. The 2011 reform also linked the retirement age to life expectancy, and it suspended or reduced pension indexation for retirees who receive large pension benefits. These measures help improve the system’s long-term sustainability (OECD, 2011c). However, the reform is unlikely to significantly alter the extent of the inequity between current workers and current retirees. The latter have been affected by the temporary intervention on benefit indexation for the highest pensions. Linking the retirement age to life expectancy will be neutral for those people fully under the NDC scheme (typically younger workers). All in all, the 2011 reform, while securing financial sustainability, has done little to restore intergenerational equity.

Japan

Retirees in Japan have paid less in pension contributions than they have received in benefits (Figure 7.2, panels 5 and 6). Net taxes paid by cohorts of current workers, children, and future generations are significantly higher because of the reforms in the 2000s. Adjustments by the macroeconomic sliding formula, which are in the authorities’ baseline projection, would lower the replacement rate. For single-earner households, the replacement rate is projected to decline from 60 percent in 2010 to 50 percent by 2038. Those ages 37 or younger in 2010 (birth cohorts of 1973 and thereafter) are fully subject to the lower replacement rate. Those who were born before 1973 will face declining replacement rates for some years during their retirement. The scheduled payroll tax increase raises net taxes on the current working generations by varying amounts, depending on their remaining years in the labor market and the payroll tax rates they face during those years. Similarly, the scheduled increase in the pension eligibility age raises the net taxes of current workers by a different margin. As a result of these parametric pension reforms, the current working generations pay much higher net taxes, on average, than already retired generations. The government would need to implement additional pension reforms in the absence of government transfers to subsidize the system, which already finances half of the old-age basic pension.

The comparison of the three countries shows that substantial legacy costs exist in Italy, which must be paid by current workers, children, and future generations. Even if each worker lives to 100 (from the individual perspective), current children and future generations pay positive lifetime net taxes, thus, they are net payers—their lifetime taxes outweigh their pension benefits. From the cohort’s perspective, which takes into account underlying age-specific mortality rates, “children” and “future generations” will have to pay relatively high positive lifetime net taxes compared with current retirees, but the gap with respect to current workers is much smaller thanks to pension reforms implemented in the past. In all three countries, current retirees are net receivers from the pension system, and all other groups from the cohort’s perspective are, on average, net payers. This outcome implies that the expected improvement in life expectancy does not justify (from an equity standpoint) additional benefit cuts for these generations, because additional cuts would raise their net taxes further and increase generational inequity with current retirees.

Searching for Options for Intergenerationally Equitable Pension Reforms

When introducing reform measures, policymakers would like to determine how not to widen the inequity between different generations. Parametric pension reforms, which aim to reduce the net pension liability of pension systems, are prone to aggravating intergenerational inequities because they usually grandfather existing pension beneficiaries—who have paid the smallest amount of net taxes into the pension system. The larger the size of the NPL, the more challenging it becomes to lower it in an intergenerationally equitable way.

One way to address this issue is to claw back pension benefits from current retirees through the tax system. Purely from the view of intergenerational fairness, pension clawback offers a useful mechanism for correcting existing inequities. The pension benefits of older retirees who paid the least into the system could be clawed back at a higher rate. Younger retirees would be clawed back at a lower rate. The rate structure can be formulated to account for existing inequities and the expected remaining years of life at a given age. If implemented, this policy should remain in effect until intergenerational fairness is restored. Implementation of such a policy would require a precise measure of generational fairness, its calculation, and transparency. This policy could make the system more generationally equitable, but policymakers might find it difficult to implement.

Alternatively, policymakers could focus on generational fairness among current workers, children, and future generations, as opposed to fairness with current retirees. To achieve this objective, a country that needs to restore the system’s long-term sustainability should implement pension reforms without delay. Putting off necessary reforms creates more and more generations that never pay their fair share, increasing the costs to future generations. This situation echoes the origin of the legacy costs passed from older retirees onto succeeding generations, including current workers, children, and future generations.

In addition, policymakers need to consider reform measures that would spread the cost of restoring long-term sustainability more broadly across currently living and future generations. When the cost is broadly shared, a financial burden imposed on any one individual (thus, any particular generation) will be smaller, preventing existing inequities from widening significantly.

Conclusion

This chapter builds on the generational accounting model to analyze the degree of intergenerational inequity in pension systems in the United States, Italy, and Japan. Past studies using generational accounting models generally focused on assessing inequities between current workers and future generations. Pension reforms, however, affect both current retirees and current workers, and past pension reform efforts show that the generosity of pension systems has varied even across different living generations. The chapter finds that the net taxes paid by current retirees are substantially lower than those paid by current workers in Italy and Japan, suggesting a high level of intergenerational inequity. This is not the case in the United States. For all three systems, net taxes from the system for current workers and children as well as future generations are positive when age-specific mortality is taken into account, suggesting that these three cohorts have to pay the substantial legacy costs and losses from forgone revenue from the past. Current pension reforms are still not sufficient to address long-term sustainability, and there are substantial needs to create fiscal space for future spending needs suggesting that the system in each of the three countries requires additional reform. To avoid widening existing intergenerational inequity, clawing back pension benefits from current retirees may be effective. Implementation of such a policy, however, may be difficult because of its complexities. The second best approach would be to focus on generational fairness among current workers, children, and future generations. Policymakers should be mindful of the potential impacts of pension reforms on existing inequities.

Appendix 7A. An Analytical Framework for Assessing the Intergenerational Equity of Pensions

Net Pension Liability and Long-Term Sustainability

Assume that a country has a PAYG pension system. Under this system, the government collects social security tax (SST) from workers and pays social security benefits (SSB) to retirees. Define the primary pension balance (PPB) at time t as

In a given base year T, the system displays net pension liabilities (NPL), which comprise the sum of the primary pension balance (PPB) between the periods T and S and the legacy debt DT-1, which captures benefits received by earlier generations of retirees who began receiving benefits before having fully paid into the system. 9 Both PPB and DT-1 are accrued at nominal interest rate r and discounted to time T at rate d. Thus NPL is defined as follows:

The last expression indicates that the long-term NPL can be thought of as the present value of the pension trust fund position (TF) at time T+S, either being an actual TF or a notional TF (Chand and Jaeger, 1996). The NPL in percent of GDP at base year TT) can be thought of as a long-term sustainability measure. Let κT,S at time T+S denote a sustainable level of NPL. Once the proper projection horizon S and the target level κT,S are defined, the government will need to implement pension reforms to reduce the imbalance when κT,S < κT,S. The size of the savings from a given reform and the cost of interest payments in each period determine the speed of adjustment in the Trust Fund account, and controls how fast the NPL declines.

Intergenerational Equity

Net taxes are computed as lifetime contributions minus benefits as a share of lifetime earnings. This figure is calculated for a representative from each generation (a single-year birth cohort). The estimation and calculation methods follow Pertile and others (2011), but this chapter focuses on two items: social security contributions and pension benefits because it is only interested in equity considerations related to pension systems. Moreover, whereas Pertile and others compare individuals 20 years old or older (born in different years), the chapter estimates contributions paid and benefits received for all currently living individuals. 10

The main indicator of intergenerational equity refers to the difference in (age-based average) net taxes (as a ratio of average lifetime earnings) between current working cohorts and current retired cohorts. Other comparisons could be made; however, the chosen comparison between workers and retirees has the advantage that it summarizes the main message of the analysis. Intergenerational equity (GAPt = 0) between working and retired generations can be expressed as follows:

in which

The payroll tax rate is denoted by t. Use w to denote the efficiency-adjusted wage received by workers at any given age at time t, which comprises the average wage rate e and workers’ efficiency q over their life cycle. The average wage rate will grow by the underlying productivity of the overall economy. The age-dependent survival probability is denoted by μ. When workers retire, they receive social security benefits, bt,a = f(we,aR,ϕ,θ) which are a function of the following parameters, the retirement age (aR), a history of worker’s wage, an income replacement rate (ϕ), and the indexation mechanism (θ) The government determines the benefit formula f() by choosing a set of parameters as well as the payroll tax rate (τt).

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1

The rationale for using this forward-looking approach is the need to compare two generations over their entire lifetimes. By contrast, evaluations of fairness that include currently living generations would require a backward- and forward-looking approach. The standard forward-looking approach ignores what these living generations previously paid in contributions and received in benefits.

2

For 2011 and 2012, the Social Security payroll tax on employees was reduced by 2 percentage points, which yielded a combined rate of 10.4 percent. Self-employed workers also paid 10.4 percent, reduced from 12.4 percent, for these two years.

3

The increase applied to the Employees’ Pension Insurance program. The pensionable age for the National Pension program has been 65 years since its inception. At least 25 years of contributions are required between the ages of 20 and 60 to receive minimum benefits from the National Pension program.

4

The number of years included for this calculation is 200.

5

The baseline scenario assumes consumer price index inflation of 1.0 percent and investment return of 4.1 percent (nominal) per year.

6

Ida May Fuller paid a total of $24.75 in payroll taxes during 1937–39, and started collecting benefits in January 1940 at age 65. Between then and her death in 1975, she collected a total of $22,888.92 in Social Security benefits (http://www.ssa.gov/history/idapayroll.html).

7

During the 1940s, income replacement rates were about 20 percent, on average, for median earners retiring at age 65. The replacement rates rose to 28 percent during the 1950s and 1960s.

8

If wages grow at a slower pace than nominal GDP, the implicit replacement rate will tend to increase.

9

The legacy debt can be thought of as the amount of government bonds issued to finance the imbalances in the pension system. In reality, government bonds are indistinct from one another. In this simplified framework, the government only runs a pension system; therefore, all debt refers to pension system imbalances. In other words, the analysis does not rule out the option of temporarily financing pension imbalances by means of debt.

10

Pertile and others (2012) use actual data from the Italian national accounts starting in 1980 to compute taxes paid and transfers received by individuals at different ages, which is why the comparison among generations is limited to individuals 20 years old or older. However, this chapter calculates contributions paid and benefits received by different individuals before 1980 for all three countries based on estimates and assumptions.

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