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Propagation and smoothing of shocks in alternative social security systems

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  • Auerbach, Alan
  • Kueng, Lorenz
  • Lee, Ronald
  • Yatsynovich, Yury

Abstract

Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model. We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U.S. system as a unifying framework, in which we vary how much taxes and benefits adjust, and which we then compare to the existing German and Swedish systems. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U.S. system best smooth productivity shocks, which are by far the most important shocks. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U.S. system, reliance solely on tax adjustment fares best for mortality and migration shocks, while equal reliance on tax and benefit adjustments is best for fertility shocks.

Suggested Citation

  • Auerbach, Alan & Kueng, Lorenz & Lee, Ronald & Yatsynovich, Yury, 2018. "Propagation and smoothing of shocks in alternative social security systems," Journal of Public Economics, Elsevier, vol. 164(C), pages 91-105.
    • Handle: RePEc:eee:pubeco:v:164:y:2018:i:c:p:91-105
    DOI: 10.1016/j.jpubeco.2018.05.012
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    2. Oliwia Komada, 2023. "Raising America's future: search for optimal child-related transfers," GRAPE Working Papers 84, GRAPE Group for Research in Applied Economics.

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    More about this item

    Keywords

    Notional defined contribution systems; Pay-as-you-go systems; Generational incidence;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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