Marital Status and Derived Pension Rights: A Political Economy Model of Public Pensions with Borrowing Constraints

• Date: 01 February 2016
• Author: TETSUO ONO
• DOI: http://doi.org/10.1111/jpet.12134
• Published date: 01 February 2016

MARITAL STATUS AND DERIVED PENSION RIGHTS:

AP

OLITICAL ECONOMY MODEL OF PUBLIC PENSIONS

WITH BORROWING CONSTRAINTS

TETSUO ONO

Osaka University

Abstract

This paper develops an overlapping-generations models featuring four

types of households: single female, single male, one-breadwinner cou-

ple, and two-breadwinner couple. The paper considers majority voting

over public pension in the presence of derived pension rights for one-

breadwinner couples. In an economy with a low intertemporal elasticity

of substitution, borrowing-constrained one-breadwinner couples may

prefer a lower tax rate than do other types of households, although the

former attain a higher benefit-to-cost ratio of public pension than do

others. Changes in the gender wage gap, the level of derived pension

rights, and the fraction of two-breadwinner couples produce an inverse

U-shaped relationship between the relevant variable and the tax rate.

1. Introduction

Most OECD (Organization for Economic Co-operation and Development) countries

offer pension benefits for nonworking spouses and divorcees. The benefits, called

derived pension rights, include (i) survivors’ benefits for widows; (ii) benefits for

divorced spouses; and (iii) spousal benefits as a supplement to a worker’s benefit

(Choi 2006; Leroux and Pestieau 2012). These benefits imply that derived pension

rights have an intra-generational redistribution component from working singles and

two-breadwinner couples to one-breadwinner couples. Thus, recent pension reforms

in many OECD countries that attempt to link contributions and benefits more closely

(OECD 2011) may provoke an intra-generational conflict over pension policy.

Despite the conflict among singles and couples caused by derived pension rights,

there are few studies focusing on these rights in the political-economic literature. Excep-

tions are the works of Leroux and Pestieau (2012) and Leroux, Pestieau, and Racionero

(2011). Leroux and Pestieau (2012) consider an economy composed of couples who

maximize the joint lifetime utility of a husband and a wife. A husband always works

Tetsuo Ono, Graduate School of Economics, Osaka University, 1-7, Machikaneyama, Toyonaka, Osaka

560-0043, Japan (tono@econ.osaka-u.ac.jp).

The author would like to thank two anonymous referees for their valuable comments and sugges-

tions which greatly improved the paper. The author also thanks participants of the Osaka Workshop

on Economics of Institutions and Organizations. This research was supported by the Grant-in-Aid for

Scientific Research (C) from the Japan Society for the Promotion of Science (No. 24530346).

Received September 21, 2014; Accepted October 5, 2014.

C2014 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (1), 2016, pp. 99–124.

99

100 Journal of Public Economic Theory

regardless of his labor productivity, whereas a wife chooses whether or not to work de-

pending on her reservation wage. Under this framework, Leroux and Pestieau (2012)

demonstrate an interaction between a wife’s labor supply decision and pension policy

preferences, and they show that a pension system with derived pension rights is likely to

emerge as a voting equilibrium outcome.

Leroux et al. (2011) assume that the degree of derived pension rights is fixed. In-

stead, they allow for the presence of single males and females and examine how the

degree of derived pension rights affects tax burden policy preferences for public pen-

sions and thus a resulting pension system via voting. Their results are as follows: (1) a

reduction of derived pension rights results in a smaller tax burden for public pension,

and (2) an increase in the share of two-breadwinner couples has two opposing effects

on the pension burden, where the net effect may be positive or negative depending on

other economic factors.

TheresultsinLerouxet al. (2011) provide significant policy predictions for pub-

lic pensions. However, these results depend heavily on the following two assumptions:

quasi-linear utility and no borrowing constraints. The first assumption, which is often

adopted in the political-economic analyses of social security (see, for example, Conde-

Ruiz and Galasso 2003, 2004, 2005; Borck 2007), makes the analysis tractable, but draws

attention away from the considerable effect of the intertemporal elasticity of substitu-

tion on a household’s decisions concerning saving and voting (Casamatta, Cremer, and

Pestieau 2000; Conde-Ruiz and Profeta 2007; Cremer et al. 2007; Arawatari and Ono

2013). The second assumption allows for borrowing against future pension benefits,

which is difficult to support from the empirical viewpoint (Diamond and Hausman

1984; Mulligan and Sala-i-Martin 1999). The aim of this paper is to relax these two

assumptions in the framework of Leroux et al. (2011) and to provide new insight into

derived pension rights from a political-economic viewpoint.

For analytical purposes, we will extend the framework of Leroux et al. (2011) in the

following two ways. First, the preferences of each household are represented by a utility

function with a constant intertemporal elasticity of substitution. Second, each house-

hold is unable to borrow against its future pension benefits. Under this extended frame-

work, we show the following two results. First, in an economy where an intertemporal

elasticity of substitution is below one, one-breadwinner couples who benefit from public

pensions may prefer a lower, rather than higher, tax rate than single females who owe

net burden, because of the presence of borrowing constraints. Borrowing-constrained

one-breadwinner couples want to choose a low tax rate to keep their after-tax income

level as high as possible. There is then a voting equilibrium, much like an ends-against-

the-middle equilibrium, in which single females, along with the old, form a coalition

against the others.

Second, when the intertemporal elasticity of substitution is below one, an inverse

U-shaped relationship is created between the relevant variable and the tax rate due

to the gender wage gap, the level of derived pension rights, and the ratio of two-

breadwinner couples. Near the maximum of the inverse U-shaped curve, the decisive

voter is borrowing-unconstrained on one side and borrowing-constrained on the other

side. This two-toned effect, as well as the ends-against-the-middle equilibrium, both of

which were not shown in Leroux et al. (2011), are derived by the presence of a borrow-

ing constraint associated with a low intertemporal elasticity of substitution.

The organization of this paper is as follows. Section 2 describes the economic envi-

ronment. Section 3 demonstrates the utility maximization of singles, one-breadwinner

couples, and two-breadwinner couples. Section 4 presents the political institution and

pension policy preferences of the young and the old. Section 5 characterizes the