Could pension system make us happier?

Abstract

This paper analyzes the effect of public pension system on lifespan and happiness level using optimal longevity model. This paper found the following. Public pension system can make life expectancy longer, however, the extension of lifespan caused by the public pension, not by own decision, cannot make happiness level higher. Under the government budget constraint, the public pension system cannot make the happiness level higher comparing to private savings. This paper concludes that the compulsory public pension system should be reconsidered because it does not contribute to well-being but raises various problems like aging population and income inequality.

Keywords:

• optimized life expectancy
• lifetime utility level
• health investments
• public pension system
• private savings

AMS Subject Classifications:

• C61
• H55
• I31

Public Interest Statement

A serious issue of many countries is expected to be an aged income guarantee system because of the public pension exhaustion and aging population. According to Melbourne Mercer Global Pension Index, US, Germany, France, UK, Italy, etc., their pension systems have major risks and/or shortcomings that should be addressed. Without improvements, its efficacy and/or long-term sustainability can be questioned. This research deals with very interesting questions whether the sheer existence of a public pension system makes people happier and live longer. This research found the following. Public pension system can increase life expectancy; however, the extension of lifespan caused by the public pension, not by own decision, cannot increase the level of happiness. The public pension system cannot increase the level of happiness if compared with private savings. Public pension systems don’t contribute to well-being, but raise various problems like aging population and income inequality and therefore should be reconsidered.

Acknowledgements

I would like to thank the editor and anonymous referees for their very useful comments and suggestions. I also thank Prof. Dr. Ronnie Sch?b (Freie Universit?t Berlin) for all his help.

Notes

1 For example, Bloom et al. (2007) and Dushi et al. (2010), Lee et al. (2000) examine the effects of improvements in health or life expectancy on social security system and saving rate. Weil (2007), Acemoglu and Johnson (2007), Zhang et al. (2001), and so on, analyze the effects of improvements in health or life expectancy on economic growth. Zhang et al. (2003) shows that rising longevity encourages both savings and earlier retirement. Zhang and Zhang (2005) show that rising longevity raises saving, schooling time and economic growth at a diminishing rate. Gorski et al. (2007) studies the effects of a pension reform on the educational level of the economy. Pecchenino and Utendorf (1999), de la Croix and Licandro (1999), Cipriani (2000), Boucekkine et al. (2002, 2003), Pecchenino and Pollard (1997, 2002), and so on, analyze the effect of longer lifespan on economic growth through the level of schooling and human capital accumulation. Lorentzen, McMillan and Wacziarg (2008) and Chakraborty et al. (2010), and so on, analyze the effect of mortality and disease on economic growth and growth trap. Lorentzen et al. (2008) mentions that higher adult mortality has bad influences on economic growth and could be the source of a poverty trap through increased levels of risky behavior, higher fertility, and lower investment in physical and human capital. Zhang and Zhang (2004) investigates how social security interacts with growth and growth determinants and shows that social security may indeed be conducive to growth.

2 For example, there are many people who still smoke, even though they know all of the health risks and there are so many warnings and pictures showing the consequences on the cigarette packets. We can interpret their behavior by saying that they prefer some present pleasure from smoking, even if smoking plays havoc with their health. It can be an example of the first case, that is, they choose to live a short and intensely happy life.

3 For example, eating good food, taking some nutritional supplements, getting in shape by going to the gym, investing in the development of medical technology, and so on. The longevity will arise due to the implementation of the previously mentioned examples of the health investments. In reality, it is well known that coronary heart disease (CHD) mortality is highly influenced by the major risk factors, e.g. serum cholesterol, systolic blood pressure, diabetes, smoking habits, high alcohol consumption, lack of exercise and stress, etc. Lifestyle changes through individual’s efforts (e.g. healthier diet, physical exercise, cessation of smoking, drinking, etc.) and medications have been shown to be effective in reducing coronary disease. If we can eliminate the risk factors, the life expectancy will undoubtedly grow.

4 According to Kimball and Willis (2006), Bentham (1781) first definition of “utility" made the equation of utility and happiness explicit. Kimball and Willis (2006) mentioned that in the existing literature attempting to link utility and happiness, the dominant explicit or implicit hypothesis is that current felt happiness is equal to flow utility. Kahneman (1999), Gruber and Mullainathan (2002), Frey and Stutzer (2004), and Layard (2005) are some of the most explicit in equating happiness and flow utility. Bonsanga and Klein (2012) use interchangeably, the expressions subjective well-being, satisfaction with life, general satisfaction, life satisfaction, and satisfaction with life in general.

5 We can divide consumption c into two categories which are the general consumption $c^G$ and the consumption for health improvement $c^H$. It is unclear whether the direct effect of the latter $c^H$ on the utility of individual is positive or negative or neutral. For examples, there might be a person who takes wheatgrass powder for his/her health maintenance even though it is unpalatable, while on the other side, there might be a person who takes it with the thinking that it is delicious. Also, there might be a person who commutes to the gym for his/her health maintenance though it is painful, while on the other side, there might be a person who goes happily to the gym. Nutritional supplements are beneficial for health but are not delicious or tasteless. Therefore, we can assume that the consumption for health improvement $c^H$ is neutral to the individual’s utility and only the general consumption $c^G$ affects the individual’s utility. This means $\frac{\partial v(c^G,c^H)}{\partial c^G}>0$ and $\frac{\partial v(c^G,c^H)}{\partial c^H}=0$, so $v(c^G,c^H)=u(c^G)$.

6 Dalgaard and Strulik (2014) introduce a wage income as a constant value during life. In Japan, in case of people who are over pension eligibility age and continue to work and get more than 280,000 Japanese yen monthly, their pension can be reduced. If the wage income is introduced in our model, we should also consider the optimal retirement age to get money from our pension. This makes our problem complicated. This research focuses on the optimal longevity. The study on optimal retirement age may be a subject of our future studies.

7 If $r=\rho$, there is no transitional path, because the jump from the initial state up to the terminal state occurs. If $r<\rho$, there is an overshooting, the amount of his/her asset accumulation turns back to the terminal state and has a negative growth rate. We do not consider the negative growth in this research.

8 Ehrlich and Chuma (1990) and Dalgaard and Strulik (2014) derived time path for health investment/cost. The aim of this research is to calculate the longevity T and the lifetime utility level U, not to calculate how to change the health investments over time. Even though we deal with z as a state variable, not constant, the results won’t change drastically.

9 When we use the numerical method to solve the T, depending on computer software, Equation (19), which is the reduced form of maximized lifetime utility function with T, is not necessary, but with the reduced form, it is easier to understand the marginal effects of parameters on the maximized lifespan utility comparing to a structural form.

10 The figure does not mean the number of years. The absolute value does not have any meanings until it is compared as the concept of the ordinal utility.

11 We can see that Equation (18) is concave against T visually in Figure 3.

12 There are many different ways to express the lifetime uncertainty problem, for example, we can model the uncertainty problem as follows, $maxE(U)={\int }_{-\infty }^{\infty }U(c|ϵ)f(ϵ)dϵ$, where $f(ϵ)$ means probability density function. However, this assumption makes the uncertainty problem very simple. We do not need to specify about the distribution of random variable $ϵ$, etc.

13 As the population ages and fewer babies are born, pension system might cause inequality problem between young generation and old generation.

14 We only consider the unchanged period in population structure, which means the population structure is in the steady state, not in transitional path.

15 To be precise, $sp\simeq (T-s)q$. We use the grid search so $\left|\frac{sp-(T-s)q}{\mathit{sp}}\right|\le$ 0.01 is regarded as equal.

16 There was an accident reported in South Korea in 2005, where a person, who was against the compulsory pension system and who was in arrears with his pension, took away his life. Also, on 30 June 2015, there was an incident where a passenger committed suicide by setting himself on fire on a shinkansen bullet train in Japan. He had repeatedly complained that his pension was too low, he only received a pension of 240,000 Japanese yen every two months, despite having made payments for 35 years. For more details, check Japan Times on July 2nd 2015. http://www.japantimes.co.jp/news/2015/07/02/national/crime-legal/shinkansen-suicide-victim-tried-buy-gas-near-home-reportedly-short-distance-ticket/

17 See Veenhoven, R., World Database of Happiness, Erasmus University Rotterdam, The Netherlands. Assessed on 1st/Jan/2016 at: http://worlddatabaseofhappiness.eur.nl for details.

18 Collecting the data over time can helpful to overcome the problem of the rough data. This time it is not easy to get the data, so we had no choice but to use the rough data.

19 To be more precise, the budget constraint data should have been used that is which countries are in balanced budget, surplus or deficit. However, it was not easy to get the information for this research.

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Inyong Shin

The author is an economist and statistician. His main research fields are Economic Growth, Computational Economics, Dynamics and Bayesian statistics. His current research area includes developing a public pension system and demography. Public pension systems have been studied in Economics as well as Social Welfare, Sociology, Statistics, etc. In many countries, the national pension fund will start shrinking roughly several decades from now and it’s in danger of disappearing. In the case of Japan, according to a pension specialist, if the Japanese pension systems are operated in that way, National Pension System and Employees’ Pension Insurance System will run out of resources in 2037 and 2033, respectively. Many governments are trying to make a new plan not to deplete the national pension fund, however, they never seem to succeed. The problems of public pension sustainability are great economic and political issues of our time and they need to be solved.