Labor Supply and Capital Accumulation in an Aging Economy: When Beveridge Meets Bismarck

Posted: 24 Sep 2015

See all articles by Gnecco Giorgio

Gnecco Giorgio

IMT Institute for Advanced Studies

Fabio Pammolli

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering; CERM Foundation

Xue Wen

IMT Institute for Advanced Studies

Date Written: April 22, 2015

Abstract

In the context of an aging economy, the question addressed in this paper is: since pension systems differ in the funding methods -- pay-as-you-go (PAYG) or fully funded -- and payment schemes -- Beveridgean or Bismarckian -- under which setting can a sustainable public pension system provide both intergenerational and intragenerational redistribution, reduce labour supply distortion, and lead to a higher physical capital accumulation? Considering a series of partial reforms within a PAYG pension system to deal with aging, the results of our analysis show that commonly used policy actions distort labor supply and depress the capital market, thus, reducing the tax base and deteriorating the growth of the economy. As a consequence, the PAYG pension system does not appear to be reformable from inside, and a (partial) transition to a funded system is necessary. Moreover, we show that, within a fully funded scheme, a transition from a pure Beveridgean system to a pure Bismarckian system substantially improves the labor supply incentives, while it tends to depress physical capital accumulation. Hence, a mix between Beveridge and Bismarck substantiates a good compromise to balance the trade-off between equity and efficiency.

Keywords: Labor Supply, Capital Accumulation, Pension, Aging Economy

JEL Classification: H55, H21, D91

Suggested Citation

Giorgio, Gnecco and Pammolli, Fabio and Wen, Xue, Labor Supply and Capital Accumulation in an Aging Economy: When Beveridge Meets Bismarck (April 22, 2015). Available at SSRN: https://ssrn.com/abstract=2664175

Gnecco Giorgio

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Fabio Pammolli (Contact Author)

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering ( email )

Via Lambruschini 4C - building 26/A
Milano, 20156
Italy

CERM Foundation ( email )

Via Fiorentina, 1
Siena, Siena 53100
Italy

HOME PAGE: http://www.cermlab.it

Xue Wen

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

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