The Retirement Behaviour of Older Workers in Transitional Economies

Research has shown that public pay-as-you-go, defined-benefit pension plans penalise those who stay at work beyond a certain age by reducing the present discounted value of future retirement benefits. In discussions on the effectiveness of policies aimed at eliminating the age-dependency factor in workers' decisions to retire, it is often assumed either that the benefits in all future periods have the same weight in the present discounted value or that the discount rate is close to unity due to low real interest rates used in this case. Galuscak first considered the U.S. pension scheme, showing that discounting plays a crucial role since the formula for the present discounted value of future retirement benefits is sensitive to the discount rate used. He then analysed the role of social security incentives and retirement provisions on older workers' behaviour in the labour markets of the Czech and Slovak Republics and the effect of the macroeconomic environment on workers' decisions to retire. He calculated the optimal parameters of the Czech and Slovak pension rules and assessed the potential effectiveness of changes to the Czech scheme introduced in January 1996.

The Permanent Income Hypothesis: A Test on Czech Privatisation

Since the late eighties, economists have been regarding the transition from command to market economies in Central and Eastern Europe with intense interest. In addition to studying the transition per se, they have begun using the region as a testing ground on which to investigate the validity of certain classic economic propositions. In his research, comprising three articles written in English and totalling 40 pages, Mr. Hanousek uses the so-called "Czech national experiment" (voucher privatisation scheme) to test the permanent income hypothesis (PIH). He took as his inspiration Kreinin's recommendation: "Since data concerning the behaviour of windfall income recipients is relatively scanty, and since such data can constitute an important test of the permanent income hypothesis, it is of interest to bring to bear on the hypothesis whatever information is available". Mr. Hanousek argues that, since the transfer of property to Czech citizens from 1992 to 1994 through the voucher scheme was not anticipated, it can be regarded as windfall income. The average size of the windfall was more than three month's salary and over 60 percent of the Czech population received this unexpected income. Furthermore, there are other reasons for conducting such an analysis in the Czech Republic. Firstly, the privatisation process took place quickly. Secondly, both the economy and consumer behaviour have been very stable. Thirdly, out of a total population of 10 million Czech citizens, an astonishing 6 million, that is, virtually every household, participated in the scheme. Thus Czech voucher privatisation provides a sample for testing the PIH almost equivalent to a full population, thus avoiding problems with the distribution of windfalls. Compare this, for instance with the fact that only 4% of the Israeli urban population received personal restitution from Germany, while the number of veterans who received the National Service Life Insurance Dividends amounted to less than 9% of the US population and were concentrated in certain age groups. But to begin with, Mr. Hanousek considers the question of whether the public percieves the transfer from the state to individual as an increase in net wealth. It can be argued that the state is only divesting itself of assets that would otherwise provide a future source of transfers. According to this argument, assigning these assets to individuals creates an offsetting change in the present value of potential future transfers so that individuals are no better off after the transfer. Mr. Hanousek disagrees with this approach. He points out that a change in the ownership of inefficient state-owned enterprises should lead to higher efficiency, which alone increases the value of enterprises and creates a windfall increase in citizens' portfolios. More importantly, the state and individuals had very different preferences during the transition. Despite government propaganda, it is doubtful that citizens of former communist countries viewed government-owned enterprises as being operated in the citizens' best interest. Moreover, it is unlikely that the public fully comprehended the sophisticated links between the state budget, state-owned enterprises, and transfers to individuals. Finally, the transfers were not equal across the population. Mr. Hanousek conducted a survey on 1263 individuals, dividing them into four monthly earnings categories. After determining whether the respondent had participated in the voucher process, he asked those who had how much of what they received from voucher privatisation had been (a) spent on goods and services, (b) invested elsewhere, (c) transferred to newly emerging pension funds, (d) given to a family member, and (e) retained in their original form as an investment. Both the mean and the variance of the windfall rise with income. He obtained similar results with respect to education, where the mean (median) windfall for those with a basic school education was 13,600 Czech Crowns (CZK), a figure that increased to 15,000 CZK for those with a high school education without exams, 19,900 CZK for high school graduates with exams, and 24,600 CZK for university graduates. Mr. Hanousek concludes that it can be argued that higher income (and better educated) groups allocated their vouchers or timed the disposition of their shares better. He turns next to an analysis of how respondents reported using their windfalls. The key result is that only a relatively small number of individuals reported spending on goods. Overall, the results provide strong support for the permanent income hypothesis, the only apparent deviation being the fact that both men and women aged 26 to 35 apparently consume more than they should if the windfall were annuitised. This finding is still fully consistent with the PIH, however, if this group is at a stage in their life-cycle where, without the windfall, they would be borrowing to finance consumption associated with family formation etc. Indeed, the PIH predicts that individuals who would otherwise borrow to finance consumption would consume the windfall up to the level equal to the annuitised fraction of the increase in lifetime income plus the full amount of the previously planned borrowing for consumption. Greater consumption would then be financed, not from investing the windfall, but from avoidance of future repayment obligations for debts that would have been incurred without the windfall.

Poverty in Slovenia: A Conseqence of Economic Transition

Slovenia is considered to be one of the most successful Central and Eastern European countries undergoing the process of transition. It has a high GDP per capita (the highest in the Visegrad group) amounting to about 7200 US dollars (at the exchange rates pertaining during Ms. Stropnik's research). In 1994, a low rate of inflation, a low level of public debt and almost balanced public finances, were all positive elements. However, there is a darker side, for instance the dramatic increase in unemployment and (somewhat less dramatic) fall in production during the transition period. This analysis aimed to provide insights into what is actually happening at the household level, since households are the ultimate bearers of macroeconomic and social change. The final output totalled 166 pages in English and Slovenian, available also on disc. The income concept used by Ms. Stropnik is that of the disposable (monetary) household income, i.e. the cash income of all household members - including social security transfers and family benefits, and the net sum of taxes and social security contributions - plus the equivalent of domestic production, used in the household. Non-monetary income sources, such as household own production, benefits in kind, subsidies for goods and services, and fringe benefits, were not taken into account. The concept of relative and objective poverty was followed. Poverty means having less than others in society, it is a state of relative deprivation. Objective aspects of the situation, e.g. command over resources (i.e. the household income) and the relative position of the household in the income distribution, determine who is poor and who is not. Changes in household composition - an increase in the number of pensioners, unemployed and self-employed, concomitant with a large decrease in the number of employees - obviously played a part in the changing structure of household income sources during this period. The overall decrease in the share of wages and salaries from primary employment in 1993 is to be observed in all income deciles. On the other hand, the importance of salaries gained from secondary employment has increased in all deciles. The lower seven deciles experienced a sharp rise in the share of social benefits in the period 1988-1993, mostly because of the increase in the number of persons entitled to claim unemployment benefits. In Slovenia, income inequality has increased considerably during the 1988-1993 period. To make matters worse, the large increase in income inequality occurred in a period of falling real incomes. In 1983 the bottom decile disposed of 3.8 percent and the top decile disposed of 23.4 percent of total monetary income in Slovenia, whereas by 1993 the same statistics revealed 3.1 percent and 18.9 percent respectively. Unemployment greatly increases the risk of living in poverty. In 1993, 35 per cent of all unemployed persons in Slovenia were living in the lowest income quintile. Ms. Stropnik found certain features that were specific to Slovenia and not shared by most countries in transition. For example, the relative income position of pensioners has improved. Retirement did not increase the risk of poverty in 1993 as much as it did in 1983 and 1988. Also, it appears that children have not been particularly hard-hit by the transition upheavals. The incidence of poverty amongst children has not increased in the period 1983-1993. Children were also fairly evenly distributed across income quintiles. In 1983, 11.8 percent of households with children aged 18 or less were poor. In 1993, this figure was 8.4 per cent. On the other hand, poor households with children were, in comparison with other households of the same type, poorer in 1993 than in 1983. Ms. Stropnik also analysed the impact of social transfers. Her conclusion was that the level of social transfers prevented them from being successful in alleviating poverty. Family policy transfers (child allowances, child tax allowances, subsidised child care) did, however, contribute to the lowering of income inequality between families with and without children, and amongst families with different numbers of children. Ms. Stropnik is determined that the results of her research be used in the creation of social policy aimed at helping the poor. She quotes Piachaud approvingly: "If the term 'poverty' carries with it the implication and moral imperative that something should be done about it, then the study of poverty is only ultimately justifiable if it influences individual and social attitudes and actions."