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Abstract: In this paper, we use an economic approach to determine households' life insurance needs. In the economic approach, life insurance needs and spending targets are simultaneously determined by smoothing households' living standards over their life cycles and ensuring comparable living standards for potential survivors. We demonstrate that life insurance recommendations provided by the economic approach are considerably different from those provided by the conventional approach. When comparing recommended with actual life insurance holdings, we find that under-insurance is widespread among secondary earners in married couples. We also identify a systematic gender bias: for any given level of financial vulnerability, couples provide significantly more protection for wives than for husbands.
Abstract: In this paper, we compare the total size of intertemporal public liabilities (IPLs) of several European countries and the United States. We utilize the machinery of generational accounting in order to calculate the composition of the countries IPLs, that is the sum of the explicit and implicit liabilities embedded in the respective fiscal policies. The findings suggest that present fiscal policies of all countries with the exception of Ireland have positive intertemporal liabilities and, hence, are unsustainable over the long-term. The study also confirms the claim made by advocates of generational accounting that explicit debt is a poor indicator of long-term fiscal sustainability. Among all EMU participants, those with the highest implicit liabilities report the lowest explicit debt. However, countries with the smallest or negative implicit liabilities have rather high explicit debt levels in the base year of the calculations reported here 1995.
Abstract: The U.S. Social Security system has helped keep many retirees out of poverty. However, according to the Social Security and Medicare Trustees, Social Security faces a future financial shortfall of $10.4 trillion in present value. This enormous imbalance has received little attention in public debates about Social Security. Instead, the media and policymakers continue to focus on the program's trust fund and several other ad-hoc measures that create a misleading impression of the size of Social Security's financial problem. Although the Social Security Trust Fund is not projected to be exhausted until 2042, Social Security's $10.4 trillion present value imbalance is accruing interest and will grow by $600 billion during 2004 alone. The current cash-flow federal budget, however, is biased against reforms that would improve Social Security's finances. As shown herein, a new federal accounting system would remove this bias.
Abstract: Government spending on the elderly is projected to increase rapidly as the U.S. population becomes older, and many policymakers and budget analysts are concerned about the continued viability of entitlement programs such as Social Security. The Social Security trustees' economic growth projections receive considerable attention because many people believe that higher growth would significantly improve the program's actuarial balance (that is, reduce its actuarial deficit). This belief is validated by Social Security trustees' calculations that show larger 75-year actuarial balances under faster assumed real wage growth rates. Since 2003 the trustees have reported the program's actuarial balance measured in perpetuity. But they do not provide sensitivity analysis that examines the impact of various assumptions on the infinite-term actuarial balance. This paper shows analytically that faster wage growth may reduce Social Security's infinite-term actuarial balance if the ratio of workers to retirees continues to decline rapidly beyond the 75th year. This result holds even if the decline in that ratio ceases after just two decades beyond the 75th year. The paper reports stylized calculations of the impact of real wage growth and demographic change - including time-varying rates of change based on official projections for the U.S. economy - on Social Security's actuarial balance in a multi-period setting. Finally, the Social Security and Accounts Simulator (SSASIM) actuarial model of Social Security financing is used to estimate the degree to which increased wage growth could negatively affect the system's infinite-term actuarial balance. These results raise questions about the conventional wisdom that holds that improved wage growth would affect Social Security's financing, and how a widely used measure of Social Security's financing captures those effects.
Social Security, wage growth, demographic change, infinite horizon, actuarial balance, sustainability
Abstract: Using the 1995 Survey of Consumer Finances and an elaborate life-cycle model, we quantify the potential financial impact of each individual's death on his or her survivors, and we measure the degree to which life insurance moderates these consequences. Life insurance is essentially uncorrelated with financial vulnerability at every stage of the life cycle. As a result, the impact of insurance among at-risk households is modest, and substantial uninsured vulnerabilities are widespread, particularly among younger couples. Roughly two-thirds of poverty among surviving women and more than one-third of poverty among surviving men results from a failure to insure survivors against an undiminished living standard. We also identify a systematic gender bias: for any given level of financial vulnerability, couples provide significantly more protection for wives than for husbands.
Abstract: The conventional approach to retirement and life insurance planning, which is used throughout the financial planning industry, differs markedly from the economic approach. The conventional approach asks households to specify how much they want to spend before retirement, after retirement, and in the event of an untimely death of the head or spouse. It then determines the amounts of saving and life insurance needed to achieve these targets. The economic approach is based on the life-cycle model of saving. Its goal is to smooth households' living standards over their life cycles and to ensure comparable living standards for potential survivors. In the economic approach, spending targets are endogenous. They are derived by calculating the most the household can afford to consume in the present given that it wants to preserve that living standard in the future. Although spending targets under the conventional approach can be adjusted in an iterative process to approximate those derived under the economic approach, there are practical limits to doing so. This is particularly the case for households experiencing changing demographics or facing borrowing constraints. This paper illustrates the different saving and insurance recommendations provided by economic financial planning software and the practical application of traditional financial planning software. The two software programs are Economic Security Planner (ESPlanner), developed by Economic Security Planning, Inc., and Quicken Financial Planner (QFP), developed by Intuit. Each program is run on 24 cases, 20 of which are stylized and 4 of which are actual households. The two software programs recommend dramatically different levels of saving or life insurance in each of the 24 cases. The different saving recommendations primarily reflect ESPlanner's adjustment for household demographics and borrowing constraints. The different life insurance recommendations reflect these same factors as well as ESPlanner's accounting for contingent household plans and for Social Security's survivor benefits. The less detailed tax and Social Security retirement benefit calculations used in our implementation of QFP also explain some of the differences between the two programs.
Abstract: This Policy Analysis explains the antecedents of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve's actions to prop up the financial sector. It argues that recovery from the financial crisis is likely to be slow with or without the government's bailout actions.
An oil price spike and a wealth shock in housing initiated the financial crisis. Declines in stock values are intensifying that shock, threatening to deepen the current recession as U.S. consumers and investors cut their expenditures. An offsetting wealth injection from additional risk-bearing investors could initiate a quicker recovery. Thus, supporters of government intervention justify the bailout's debt-financed fund injections - in essence, they want to compel future taxpayers to join the group of today's riskbearing investors.
However, the bailout is poorly designed and its implementation appears panicky - marked by a knee-jerk trial-and-error process that may have heightened market uncertainty. Worse, current interventions in market processes and institutions could become permanent, to the probable detriment of the nation's long-term economic prospects. With or without the bailout, the ongoing recession is likely to be deep and long.
From a philosophical perspective, any bailout action provides a host of bad incentives. Moreover, we should be mindful that future generations already face massive debt burdens from entitlement programs. Increasing those burdens by expanding the bailout program or enacting a massive fiscal stimulus will hasten the long-anticipated crisis in entitlement programs. Thus, the ongoing economic crisis could usher in permanently higher taxes, greater government involvement in the private sector, and a prolonged period of slower economic growth.
Emergency Economic Stabilization Act of 2008, ownership society, financial shock, wealth shock, mortgage-backed securities, credit default swaps, structured investment vehicles, CDS
Abstract: Contributing to 401(k)s and similar tax-deferred retirement accounts certainly lowers current taxes. But does it lower your lifetime taxes? If average and marginal tax rates were independent of income and didn't change through time, the answer would be an unambiguous yes. The reduction in current taxes would exceed the increase in future taxes when measured in present value. But tax rates may be higher when retirement account withdrawals occur, either because one moves into higher marginal federal and state tax brackets or because the government raises tax rates. In addition, reducing tax brackets when young, at the price of higher tax brackets when old, may reduce the value of mortgage deductions. Finally, and very importantly, shifting taxable income from youth to old age can substantially increase the share of Social Security benefits subject to federal income taxation. This paper uses ESPlanner, a detailed life-cycle personal financial planning model to study the lifetime tax advantage to stylized young couples of participating in a 401(k) plan. Assuming a percent real return on assets, we find that low- and moderate-income households actually raise their lifetime taxes and lower their lifetime expenditures by saving in a 401(k) plan. In the case of a couple with $50,000 in annual earnings, partaking fully in the typical 401(k) plan raises lifetime tax payments by 1.1 percent and lowers lifetime expenditures by 0.4 percent. The lifetime tax hike is 6.4 percent and the lifetime spending reduction is 1.7 percent for such households if they receive an 8 percent real rate of return. These figures rise to 7.3 percent and 2.3 percent, respectively, if taxes are increased by 20 percent when the couple retires. These findings are driven, in large part, by the additional Social Security benefit taxation induced by 401(k) withdrawals. The picture is quite different for high-income young couples with so much income that 401(k) participation cannot a) lower and then raise their marginal income tax rates or b) raise the share of their Social Security benefits that is taxable. For such couples 401(k) participation means major lifetime tax savings. At a 6 percent real return, a couple earning at the rate of $300,000 per year would enjoy a 6.8 percent lifetime tax break, which translates into a 3.9
Abstract: Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust - and the subsequent financial crisis and recession - would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.
Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.
Gramm-Leach-Bliley Act, CDS, Credit Default Swap, systemic risk, GLB, Commodity Futures Trading Commission, CFTC, Basel I, Basel II, TBTF, Too Big to Fail, Catastrophe Bonds, shadow banking
Abstract: This paper describes the deficiencies of the measures used to calculate the federal budget, make revenue and spending projections, and assess the sustainability of current fiscal policies. The nature of the deficiencies hides the tremendous impact that Social Security and Medicare commitments will have on the budget in the future, given the way the programs are structured currently and the momentous demographic shift underway as the baby boom generation approaches retirement age. This paper proposes two new simple measures that will enable government officials and the public to calculate more accurately the costs of maintaining these programs into the relevant future. The measures provide a better understanding of the costs involved, when they will be incurred, and by whom. The measures also provide a way to meaningfully compare the various solutions that have been proposed for dealing with the impending fiscal crisis that will be caused by Social Security and Medicare. This article was also published as a monograph by the AEI Press, the publisher for the American Enterprise Institute.
Abstract: This study examines the adequacy of life insurance among married American couples approaching retirement. It improves upon previous work in two ways. First, it is based on recent, high quality data (the 1992 Health and Retirement Survey with matched Social Security earnings histories). Second, it employs new financial planning software to evaluate the life insurance needs of each household. This software embodies an elaborate life- cycle planning model that accounts for a broad array of demographic, economic, and financial characteristics. We find that a sizable minority of couples in the HRS sample are significantly underinsured. Almost one third of wives and more than 10 percent of husbands would have suffered living standard reductions of 20 percent or more had their spouses died in 1992. Underinsurance tends to be more common among low income households, couples with asymmetric earnings, younger households, couples with dependent children, and non-whites. In general, households with greater vulnerabilities do not appear to compensate adequately for these vulnerabilities through greater life insurance holdings. Among some groups, the frequency of underinsurance exceeds two-thirds, and the frequency of severe underinsurance (a reduction in living standard of 40 percent or greater) exceeds one-quarter.
Abstract: The conventional view that faster wage growth would improve Social Security's financial condition rests on several measures of the program's finances that the Social Security trustees emphasize in their annual reports. These measures include annual cash-balance ratios, the 75-year actuarial deficit, the "crossover date," and the "trust fund-exhaustion date." All of these measures show that Social Security's financial condition would improve if future wage growth were faster. This conventional view also suggests that the trustees' relatively conservative assumptions about future wage growth cause the program's financial imbalance to be overstated. Unfortunately, the measures highlighted in the trustees' annual reports have a short-term orientation that biases calculations toward showing an improvement under faster wage growth. The connection between wage growth and Social Security's finances should be evaluated using measures that are free of a short-term bias. This Policy Analysis evaluates the connection under the more comprehensive infinite-horizon "fiscal imbalance" measure. It uses simple cases of the program's operation to explore the impact of the relevant forces - population aging, wage growth, discount rates, and the projection horizon. It shows that although faster wage growth is desirable in and of itself to increase general prosperity, it would likely worsen Social Security's overall financial condition. By implication, a "do nothing" policy motivated under the conventional view would be diametrically opposed to the correct perspective: Early reforms of Social Security should receive higher priority under faster wage growth.
social security, wage growth, financial imbalance, calculations, annual reports, infinite horizon, population aging, wage discount rates, general prosperity, social security reform
Abstract: Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national saving. It decomposes postwar changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: The redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare, and Medicaid benefits. The increase in the elderly's consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare, and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed.
Abstract: Does it pay to work? Given the number and complexity of federal and state tax and transfer systems, this is a tough question to answer. The problem is greatly compounded by the fact that what one earns in one year alters not just current taxes and transfer payments in that year, but in future years as well. Thus, understanding the net effective tax on work and the changes in this taxation associated with policy reforms requires an intertemporal model capable of carefully determining tax and transfer payments at each stage of the life cycle. This study uses ESPlanner, a financial planning software program, to study the net work tax levied on workers with different earnings capacities. ESPlanner smooths households' living standards subject to their capacities to borrow. In so doing, it makes highly detiled, year-by-year federal and state income tax and Social Security benefit calculations. To produce a comprehensive net work tax measure, we added to ESPlanner all other major transfer programs. We focus on lifetime average and marginal net work-tax rates, which are measured by comparing the present values of lifetime spending from working through retirement both in the presence and in the absence of all tax-transfer programs. We form these tax rates for young stylized married workers. We report seven findings. First, our fiscal system is highly progressive. Households earning the minimum wage receive 18 cents in benefits net of taxes for every dollar they earn. In contrast, households with million dollar salaries pay 54 cents in taxes net of benefits per dollar earned. Second, progressively is primarily restriced to the bottom end of the income distribution. Average net work tax rates of middle class households are relatively high compared with those of the rich. Third, while the poor face negative average taxes, they face significant positive marginal net taxes on working. Indeed, a minimum wage household that chooses to work is forced to surrender 34 cents of every dollar earned in net taxes. Those with earnings that exceed 1.5 times the minimum wage face marginal net taxes on full-time work above 50 percent. Fourth, low-wage workers face confiscatory tax rates on switching from part-time to full-time work. Fifth, the same is true of secondary earnings spouses in low-wage households with low incomes. Six, the marginal net tax on working is particularly high for young households with low incomes. Seventh, average and marginal net work tax rates are relatively insensitive to the assumed rate of real wage growth and the discount rate. And eighth, major tax reforms, such as switching from income to consumption taxation, can have an significant affect on the fiscal system's overall progressivity.
Abstract: This paper presents a set of generational accounts (GAs) that can be used to assess the fiscal burden current generations are placing on future generations. The GAs indicate the net present value amount that current and future generations are projected to pay to the government now and in the future. The generational accounting system represents an alternative to using the federal budget deficit to gauge intergenerational policy. From a theoretical perspective, the measured deficit need bear no relationship to the underlying intergenerational stance of fiscal policy. Within the range of reasonable growth and interest rate assumptions the difference between age zero and future generations in GAs ranges from 17 to 24 percent. This mean that if the fiscal burden on current generations is not increased relative to that projected from current policy (ignoring the just enacted federal budget deal) and if future generations are treated equally (except for an adjustment for growth) the fiscal burden facing all future generations over their lifetimes will be 17 to 24 percent larger than that facing new borns in 1989. The just enacted budget will, if it sticks, significantly reduce the fiscal burden on future generations.
Abstract: This paper develops, calibrates, and simulates a dynamic 88-period OLG model to study the intergenerational transmission of U.S. wealth inequality via bequests. The model features marriage, realistic fertility patterns, random death, assortative mating based on skills, heterogeneous skill endowments, heterogeneous rates of return, skill inheritability, progressive income taxation, and resource annuitization via social security. All bequests arise from imperfect annuitization. Nonetheless, the model generates a realistic ration of aggregate wealth to aggregate labor income, a realistic bequest flow relative to the stock of wealth, and a realistic wealth distribution at retirement. Skill differences, assortative mating, social security, and the time preference are the primary determinants of wealth inequality. Bequests do propagate wealth inequality, but only in the presence of social security, which disproportionately disinherits the lifetime poor. Intergenerational wealth immobility, also considered here, is primarily determined by the inheritance of skills from one's parents and the magnification of the impact of this inheritance by marital sorting.
Abstract: Current trends and policies imply unsustainable growth in federal Medicaid outlays. Making conservative assumptions about future growth in Medicaid enrollment and spending per beneficiary, this paper estimates that the present value of federal Medicaid outlays over the next 100 years will take up 24 percent of the present value of federal general revenues and 3.7 percent of the present value of GDP calculated over the same period. If current policies and trends are maintained, federal Medicaid outlays will take up 36 percent of lifetime federal general revenue taxes for males born in 2025 and 69 percent for females born in that year. For females born after 2050, almost all of their lifetime federal nonpayroll taxes will be consumed by their lifetime Medicaid benefits. Higher tax rates cannot plausibly cover this growing spending commitment. Limiting Medicaid spending growth is, thus, an essential component of putting the federal budget on a sustainable course without imposing crushing tax burdens on younger and future generations, thereby harming the prospects for future economic growth.
Medicaid, Jagadeesh Gokhale, tax rates, sustainability, federal budget, health care, health care programs, males, females, contributions, future costs, spending projections, medicare services, medicare enrollments, growth, GDP, government revenues, life expectancy, federal medicare outlays
Abstract: This paper addresses three questions related to limits on DC contributions. The first is whether statutory limits on tax-deductible contributions to defined contribution (DC) plans are likely to be binding, focusing on households in various economic situations. The second is how large is the tax benefit from participating in defined contribution plans. The third is how does the defined contribution tax benefit depend on the level of lifetime income. We find that the statutory limits bind those older middle-income households who started their pension savings programs late in life, those who plan to retire early, single-earner households, those who are not borrowing constrained, and those with rapid rates of real wage growth. Most households with high levels of earnings, regardless of age or situation, are also constrained by the contribution limits. Lower or middle-income two-earner households that can look forward to modest real earnings growth are likely to be borrowing constrained for most of their pre-retirement years because of the costs of paying a mortgage and sending children to college. These households are not in a position to save the 25 percent of earnings allowed as a contribution to DC plans. Some of these middle-income households, however, are constrained by the $10,500 limit on elective employee contributions to 401(k) plans if the households have access to only these plans and their employers make no pension contributions for them. The borrowing constraints faced by many lower- and middle-income Americans means that contributions to DC plans must come at the price of lower consumption when young and the benefit of higher consumption when old. Indeed, for a stylized household earning $50,000, consistently contributing 10 percent of salary to a DC plans that earns a 4 percent real return means consuming almost two times more when old than when young. Measured as a share of lifetime consumption, the tax benefit from participating in a DC plan can be significant.
Abstract: This paper uses ESPlannerTM - a life-cycle, financial planning model - to investigate the potential impact of alternative fiscal policies on current consumption and saving. Studies to date have examined the response of current consumption to tax-induced temporary and permanent income changes. To our knowledge however, no study has directly examined whether consumption smoothing is actually feasible. ESPlanner's saving and life insurance recommendations generate the smoothest possible survival-state contingent lifetime consumption path for the household without putting it into debt. Such consumption smoothing is predicted by economic theory and appears to accord closely, on average, with actual behavior. By running households through ESPlanner based on current policy as well as on alternative fiscal policies, one can easily compare the program's consumption response to hypothetical tax and transfer policy changes and assess the degree to which borrowing constraints may be playing a role in determining the size of those responses. The households used in our analysis are drawn from the Federal Reserve's 1995 Survey of Consumer Finances. This data set provides detailed information on household earnings, assets, housing, demographics, and retirement plans - all of which is used by ESPlanner in formulating its recommendations. The policies we consider are tax hikes, tax cuts, social security benefit cuts, and the elimination of tax-deferred saving. Our analysis distinguishes between immediate and future policy changes as well as between permanent and temporary ones. Our results are influenced by the fact that a majority - 57 percent - of our sample of households, many of which are young, is borrowing-constrained and, thus, more responsive to current than future policy changes no matter how long their duration. The results are also very sensitive to the particular policy being enacted. Income tax changes, for example, have little effect on the consumption/saving of low-income households for the simple reason their income tax liabilities are relatively small. And social security benefit cuts will have minor effects on the young because they lie so far in the future and the young are generally borrowing constrained. On the other hand, eliminating tax-deferred saving will have no effect on current retirees greatly influence the spending of the young, since such a policy would relax their borrowing constraints. The significant heterogeneity in consumption/saving responses to policy changes depending on the ages and resource levels of the households in question and the particular policy undertaken makes it difficult to summarize our quantitative findings apart from saying that each of the policies considered has a quite sizeable impact on the current consumption and saving behavior of a substantial subset of our sample.
Abstract: This paper uses matched data on the elderly and their children to study the provision of time by children to the elderly. It develops a Tobit model as well as a structural model to analyze the determinants of this decision. The main determinants of the amount of time given to parents appear to be the parent's age, reported health, and institutionalization status, and the children's age, health and sex. Older parents, less healthy parents, and non-institutionalized parents receive more time from their children, while younger children, healthier children, and female children provide more time. In contrast to these demographic determinants, economic variables, such as children's wage rate and income levels, appear to play a rather insignificant role in the provision of time. In addition, the evidence does not support the hypothesis that parents purchase time from their children.
Abstract: Our previous study (Auerbach, Gokhale and Kotlikoff 1991) introduced the concept of "generational accounting," a method of determining how the burden of fiscal policy falls on different generations. It found that fiscal policy in the U.S. is out of balance, in terms of projected generational burdens. This means that either current generations will bear a larger share (than we project under current law) of the burden of the government's spending or that future generations will have to pay, on average, at least 21 percent more, on a growth-adjusted basis, then will those generations who have just been born. These conclusions were based on relatively optimistic assumptions about the path of social security and Medicare policies, namely that the accumulation of a social security trust fund would continue and that Medicare costs would not rise as a share of GNP. In this paper, we simulate the effects of realistic alternative paths for social security and Medicare. Our results suggest that such alternative policies could greatly increase the imbalance in generational policy, making not only future generations pay significantly more, but current young Americans as well. For example, continued expansion of Medicare in this decade alone could double the 21 percent imbalance figure if the bill for this Medicare growth is shifted primarily to future generations.
Abstract: As currently legislated, the U.S. Social Security System represents a bad deal for postwar Americans. Of every dollar postwar Americans have earned or will earn over their lifetimes, over 5 cents will be lost to the Old Age Survivor Insurance System (OASI) in the form of payroll taxes paid in excess of benefits received. This lifetime net tax rate can also be understood by comparing the rate of return postwar contributors receive from OASI and the return they can earn on the market. The OASI return -- 1.86 percent -- is less than half the return currently being paid on inflation-indexed long-term government bonds, and the OASI return is much riskier. Of course, Social Security is an insurance as well as a net tax system. But, viewed as an insurance company, the insurance OASI sells (or, rather, forces households to buy) is no bargain. The load charged averages 66 cents per dollar of premium. These findings, developed in an extensive micro simulation study by Caldwell, et al. (1999), assume that current law can be maintained through time. But Social Security faces a staggering long-term funding problem. Meeting the system's promised benefit payments on an ongoing basis requires raising the OASDI 10.8 tax rate immediately and permanently by two fifths! How bad can Social Security's treatment of postwar Americans get once adjustments are made to save' the system? This paper examines that question using the machinery developed in Caldwell, et al. Specifically, it considers Social Security's treatment of postwar Americans under alternative tax increases and benefit cuts that would help bring the system's finances into present value balance. The alternatives include immediate tax increases, eliminating the ceiling on taxable payroll, immediate and sustained benefit cuts, increasing the system's normal retirement ages beyond those currently legislated, switching from wage to price indexing in calculating benefits, and limiting the price indexation of benefits. The choice among these and other alternatives have important consequences for which postwar generations and which members of those generations will be forced to pay for the system's long-term financing problems.
Abstract: U.S. policy changes and more optimistic fiscal forecasts have significantly improved the long-term fiscal prospects of the country. Nevertheless, these prospects remain dismal. Unless U.S. fiscal policy changes by a lot and very soon, our descendants will face rates of lifetime net taxation that are 70 percent higher than those we now face. They will, on average, find themselves paying 1 of every 2 dollars they earn to a local, state, or federal government in net taxes. A number of factors, besides current and projected Medicare spending, are responsible for the imbalance in U.S. generational policy. But the ongoing excessive growth of Medicare benefits is certainly a key culprit. Achieving generational balance solely by cutting Medicare benefits is feasible but would require cutting over two-thirds of the program's expenditures assuming the cuts were made today. If one waits five years before cutting Medicare, four-fifths of the programs would have to be slashed. Clearly, Medicare cuts of this magnitude are unlikely to happen, but however we resolve our sever crisis in U.S. generational policy, it's clear that significant reductions in Medicare spending will be a major part of the story.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Abstract: Social Security faces a major long-term funding crisis. A 38 or greater percentage increase in the systems' tax rate is needed to meet current benefit payments on an ongoing basis. Tax increases of this magnitude or comparable benefit cuts would significantly worsen what is already a very bad deal for postwar Americans. This paper uses CORSIM -- a dynamic micro simulation model -- and SOCSIM -- a detailed Social Security benefit calculator -- to study this deal. The study finds that baby boomers will, under current law, lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. For today's children the figure is 7 cents. Measured as a proportion of their lifetime labor incomes, the middle class are the biggest losers, but measured in absolute dollars, the rich lose the most. Out of every dollar that postwar Americans contribute to the OASI system, 74 cents represent a pure tax. The system treats women better than men, whites better than non-whites, and the college educated better than the non-college educated. While the system has been partially effective in pooling risk across households, it offers postwar cohorts internal rates of return on their contributions that are quite low. Those born right after World War II will earn, on average, a 2.4 percent real rate of return. Those born in the early 1970's will average about a 1 percent real rate of return, and those born at the end of this decade will average essentially a zero rate of return.
Abstract: This paper constructs a unique cohort data set to study the changes since 1960 in the share of Americans' resources that are annuitized. Understanding these changes is important because the larger this share, the more cohorts are likely to consume and the less they are likely to bequeath. Hence, the degree of annuitization affects national saving as well as the transmission of inequality over time. Our findings are striking. Although the annuitized share of resources of younger Americans declined slightly between 1960 and 1990, it increased dramatically for older Americans. It doubled for older men and quadrupled for older women. Since the elderly have much higher mortality probabilities than do the young, their degree of annuitization is much more important for aggregate bequests and saving. According to our estimates, aggregate U.S. bequests would now be 66 percent larger had the post-1960 increase in annuitization not occurred. In addition, U.S. national saving would likely be substantially larger than is currently the case.
Abstract: No abstract is available for this paper.
Abstract: If the U.S. federal government properly accounted for its explicit and promised liabilities, it would record a national debt of $64 trillion and a national deficit of $2.4 trillion in 2006. Although capital markets seem to care about the officially reported budget deficit a metric that is backward looking and quite misleading the markets have done little more than yawn at the federal government's mammoth, and growing, forward-looking budget imbalance. Are investors uninformed? They should remember that the common belief that capital markets cannot fail is precisely the reason why they can.
Economics, Macroeconomics, Relationship of Economic Activity to the Investment Process
Abstract: This paper develops, calibrates, and simulates a dynamic 88-period OLG model to study the intergenerational transmission of U.S. wealth inequality via bequests. The model features marriage, realistic fertility patterns, random death, assortative mating based on skills, heterogeneous skill endowments, heterogeneous rates of return, skill inheritability, progressive income taxation, and resource annuitization via social security. All bequests arise from imperfect annuitization. Nonetheless, the model generates a realistic ratio of aggregate wealth to aggregate labor income, a realistic bequest flow relative to the stock of wealth, and a realistic wealth distribution at retirement. Skill differences, assortative mating, social security, and the time preference are the primary determinants of wealth inequality. Bequests do propagate wealth inequality, but only in the presence of social security, which disproportionately disinherits the lifetime poor. Intergenerational wealth immobility, also considered here, is primarily determined by the inheritance of skills from one's parents and the magnification of the impact of this inheritance by marital sorting.
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