Pension income replacement: permanent and transitory determinants

Abstract: We extend analysis of fine-grained measures of social policy benefit levels to pension policy, with health care policy the most costly and economically consequential of social policies. To do so we analyze public pension income replacement rates(IRRs) for 18 affluent democracies, 1975-2000, using error correction (EC) models that allow for distinct longer-run and shorter-run estimates that may be particularly important for pension benefits. Results from EC models indicate economic globalization (especially accelerating trade openness), high economic growth, and some varieties of domestic economic malaise (especially unemployment and public deficits). Also, where fixed-effect constraints on estimate precision are relaxed for temporally quasi-invariant explanatory variables using Plmper and Troeger's (2007) fixed-effect variance decomposition (or 'xtfevd') model, cumulative Right cabinet strength, state-structural veto points and neocorporatism also figure in the limitation, if not reversal, of pension benefits.

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