Incomplete Careers and Public Pension: A General Equilibrium Approach

We address the effects of incomplete career path, due to career interruptions related with recurrent and persistent unemployment, on pension entitlements, old-age poverty, and income distribution, using a general equilibrium model. Observation of recent labor markets around the world shows the tendency of later career start, more frequent and longer unemployment, and increase in part-time employment. The unstable employment status reduces the pension contribution period, the opportunity of acquiring pension entitlements, and pension benefits. To mitigate the problems resulting from interrupted work history, many countries implemented policy schemes, such as pension credits for career breaks, reinforcement of redistributive elements in pension benefit formula, reduction of required pension contribution period for pension benefit entitlement. These arrangements may boost the pension entitlements, but they have conflict with the purpose of pension finance stability, cause the moral hazard of the underemployed avoiding employment, and increase the pension contribution burden of regularly employed pension participants which deteriorates their work incentives. We construct a multi-income-class, general equilibrium overlapping generations model, which reflects the decision on tertiary education and career start timing, the idiosyncratic unemployment risks across income groups and ages, endogenous selection among employment and voluntary unemployment, and pension benefit formula. Policy simulation using the model and the calibration reflecting Korean labor market, and public pension shows that: The reinforcement of redistributive element of pension benefit formula, which increases (reduces) the pension benefit of lowincome (high-income) groups, increases the pension benefits for those who are vulnerable to the income risk in old ages without excessively deteriorating macroeconomic variables. Allowance of moderate level of pension credits improves the efficiency of the economy through increase in the educational investment, but, it does not improve the equity, because it widens the gap in the pension between income groups. Therefore, an appropriate combination of these two policy schemes may be used to attain the policy goals to provide adequate resources to the low-income elderly without large adverse impacts on the economy.