WPS 1200

- This paper a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to investigate **the** complex issues related to old age security arrangements. The study is funded by the Bank's Research Support Budget under **research** prmject "income Security for Old Age." Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. PIease contact Daniele Evans, room N9-057, extension 37496 (October 1993, 75 pages).

Using a dynamic cohort microsimulation model (LIFEMOD), FalUingham and Johnson examine the life-cycle distributional consequences of a variety of pay-as-you-go (PAYG) and funded pension systems. This technique allows them to investigate both the socioeconomic characteristics and the number of people affected by a change in contribution or eligibility rules in any pension system.

LIFEMOD uses 1985 parameters for the United Kingdom so specific results are not valid for other countries. But winners and losers are likely to be similar across countries. They find that:

* Women benefit much more than men in a flat-rate PAYG system. In simulations, 84 percent of surviving women but only 33 percent of surviving men are net beneficiaries, because women have higher life expectancy and lower lifetime earnings.

* Imposing minimum contributions substantially reduces the number of women who qualify for a pension. Imposing a joint contribution rule on the earnings of married couples significantly increases the number of women qualifying without significantly reducing the proportion of qualifying men.

* In funded pension systems, on average men accumulate much more pension capital than women do because of men's higher eamings and more continuous paid work. Different rates of real interest and eamings growth affect individuals' fund accumulation differently. Women benefit more from high rates of return and low earnings growth because they tend to receive a higher proportion of their lifetime earnings when young. But some men and many women fail to achieve minimum pension levels. If the pension shortfall is compensated for by lump-sum capital top-ups, women receive 93 percent of top-ups (70 percent if joint contributions are used).

* In hybrid pension systems that combine both PAYG and funded elements, the higher the proportion of PAYG payments, the greater the replacement rate for people in the bottom 40 percent of the lifetime eamings distribution (the majority of whom are women). But replacement rates for pcople in the middle of income distribution are insensitive to any variant of the PAYGfunded combination.

In short, flat-rate pay-as-you-go pension plans and funded pensions produce very differcnt distributional outcomes, the single most important determinant of which is the different lifetime employment and earnings records of men and women.

The Policy Rcsearch Working Paper Seriesdisseminates the fmdings of work nder way in the Bank Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The fmdings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Prdoced by the Policy Reseach Dissemainon Center