Evaluating pay-as-you-go social security systems
AbstractThis paper proposes a new method for welfare analysis of unfunded social security systems. Based on an overlapping generations model with endogenous labor supply, we derive a formula for the evaluation of existing pay-as-you-go social security systems that depends on impulse response functions and projected growth rates only. We propose an implementation strategy based on reduced form estimates of a VAR model that is valid under weak assumptions about the deep structure of the model. Our method is related to the sufficient statistic approach (Chetty, 2009). For the current system in the United States, we find that a transitory increase in the payroll tax rate along with higher pension benefits leads to a welfare increase mainly due to welfare gains of today's retirees. A scenario analysis demonstrates the robustness of this result.
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Date of creation: Nov 2013
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unfunded social security system; sufficient statistic; overlapping generations; reduced form VAR;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-11-29 (Economics of Ageing)
- NEP-ALL-2013-11-29 (All new papers)
- NEP-DGE-2013-11-29 (Dynamic General Equilibrium)
- NEP-MAC-2013-11-29 (Macroeconomics)
- NEP-PBE-2013-11-29 (Public Economics)
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