Between equality and efficiency: Work incentives, social redistribution and gender equality in the reformed pension system

In an article published in Søkelys på arbeidslivet, Stian Nicolajsen and Nils Martin Stølen show that the distributional implications of the Norwegian pension reform differ according to the specific questions asked. Total expected benefits over the life cycle appears to be more equally distributed among a cohort that is fully covered by the reformed system as compared to the counterfactual distribution that would have obtained under the old system. One factor contributing to this result is the under-indexation of benefits in the reformed system. The under-indexation negatively affects more well off segments who can expect to live longer that the average pensioner. Another factor is the currently observed propensity - particularly among males - to start taking out pension benefits early in combination with full time employment. This kind of behaviour will tend to reduce expected life-time benefits - in particular for more well-off individuals with an above average life expectancy. If one instead looks at the distribution of pension benefits for a cohort in a single year or the distribution over a cross-section of old age pensioner at a given moment in time, the outcome is more unequal with the reform compared to the pre-reform system. In a study that has been accepted for publication by Journal of European Social Policy, Elin Halvorsen and Axel West Pedersen analyse the distributive outcome of the reform in a gender perspective. More specifically we use a micro-simulation model (MOSART) to explore how different components of the reformed system affect the gender gap in pensions and the overall level of inequality among members of the cohort born in 1963. Although the core of reformed Norwegian pension system is built on the Notional Defined Contribution model and designed to achieve a close link between life-time earnings and expected pension benefits, a series of redistributive components ensure that the gender gap in pensions is very significantly reduced. Looking at individual pension income, the projected gender gap in average benefits received over the retirement phase for the 1963 cohort is reduced from 43% - the projected outcome of a hypothetical actuarially fair system ? to only 7% with all the redistributive components in place, including a progressive system of pensioner taxation. As expected the gender neutral annuity divisor gives the single most important contribution to close the gender gap, and the effect would have been even a little larger if pension had been fully indexed with wages over the retirement phase. Among the family related benefit components, the child credits have the strongest effect decreasing the gender gap in average yearly pension benefits over the retirement fase by 6 percentage points. The effect of inherited pension rights is only about half of this. However, the sequence plays a role here. It is shown that the partial (net) effect of removing the child credits is about the same as the corresponding net effect of removing the right to inherit benefits. These two women friendly components, however, systematically weaken the labour supply incentives, particularly for women. So while the reformed Norwegian pension system performs comparatively well in terms of closing the gender gap in pensions, it does so partly with the help of benefit components that do not reward and incentivise a more balanced sharing of informal and formal work over the life-course. During the preparation of the Norwegian pension reform a number of estimates were published about a significant positive labour supply effect of the reform compared to the old system. An important part of the effect was assumed to arise from the closer and more transparent link between earnings and pension rights in the new NDC-framework for accruing pension rights. In a paper that has been presented at a number of international and national conferences Harald Dale-Olsen, Axel West Pedersen and Pål Schøne discuss the theoretical foundations of a possible labour supply effect over the entire working life and try to identify the effect using public register data covering the period before and after the reform. If a labour supply effect of the system for accruing pension rights exists, it can be expected to affect the 1963 and younger cohorts from the time that the nature of the new system was decided. A number of different empirical strategies are used in the paper and they all try to take advantage of the fact that pension accrual in the new system stops very abruptly at an annual income of 7.1 Base-Amounts. If there is a labour supply effect of the system of accrual, it should be visible here. The results are mixed. In some specification we do find a small effect, but in others not. The paper concludes that the assumption about a significant labour supply effect of the accrual system is lacking firm empirical support.

The project addresses the second theme of the call ('Inntektssikring og fordelings- og likestillingsprofil'), and the research will be organised in three modules: The first module (A) comprises studies of the incentive structure created by the new system of pension accrual as well as its possible effects on labour supply using available up-to-date register data for the adult Norwegian population (FD-trygd). In the second module (B) we will use the dynamic micro-simulation model (MOSART) developed by Stat istics Norway to gain new insights into the distributive implications of the reformed system in a diachronic lifetime perspective. The sub-studies of the this module include analyses of the intra-cohort distribution of pension benefits, the impact of fami ly sensitive benefit components on the distribution of household disposable income, and how the redistribution life-time income achieved by the pension system is modified by social inequalities in life-expectancy. The third module (C) will use in depth qu alitative interviews and web-based surveys to study the way individuals and couples relate to the new system of pension accrual both in terms of its perceived fairness, its expected adequacy, and its motivational effect on labour supply. We will here focu s in particular on the mixture of what we call 'family sensitive benefit components' in the reformed system: credits for child rearing, bequest of pension rights between married spouses, and differentiation of minimum benefits between singles and couples. The project will be carried out in collaboration between Institute for social research (ISF) and Statistics Norway (SSB).