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Evaluating pay-as-you-go social security systems

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  • Andreas Bachmann
  • Kaspar Wüthrich

Abstract

This 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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Bibliographic Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp1310.

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Date of creation: Nov 2013
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Handle: RePEc:ube:dpvwib:dp1310

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Keywords: unfunded social security system; sufficient statistic; overlapping generations; reduced form VAR;

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  1. Kotlikoff, Laurence J. & Smetters, Kent & Walliser, Jan, 2007. "Mitigating America's demographic dilemma by pre-funding social security," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 247-266, March.
  2. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  3. Kelvin R. Utendorf & Rowena A. Pecchenino, 1999. "Social security, social welfare and the aging population," Journal of Population Economics, Springer, vol. 12(4), pages 607-623.
  4. Nourry, Carine, 2001. "Stability of equilibria in the overlapping generations model with endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1647-1663, October.
  5. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
  6. David Card & Raj Chetty & Andrea Weber, 2006. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," NBER Working Papers 12639, National Bureau of Economic Research, Inc.
  7. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, 04.
  8. Imrohoroglu, Selahattin & Kitao, Sagiri, 2009. "Labor supply elasticity and social security reform," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 867-878, August.
  9. Gonzalez-Eiras, Marti­n & Niepelt, Dirk, 2008. "The future of social security," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 197-218, March.
  10. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2012. "Pension reform with variable retirement age: a simulation analysis for Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(03), pages 389-417, July.
  11. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
  12. Zheng Song, 2011. "The Dynamics of Inequality and Social Security in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 613-635, October.
  13. Lopez-Garcia, Miguel-Angel, 2008. "On the role of public debt in an OLG model with endogenous labor supply," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1323-1328, September.
  14. Fanti, Luciano & Spataro, Luca, 2006. "Endogenous labor supply in Diamond's (1965) OLG model: A reconsideration of the debt role," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 428-438, June.
  15. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
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