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The Risk of Social Security Benefit-Rule Changes: Some International Evidence

In: Risk Aspects of Investment-Based Social Security Reform

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  • John McHale

Abstract

Against a background of projections of sharply increasing elderly dependency rates, workers in the major industrial economies are apprehensive that their social security benefit entitlements will be cut before or after they retire, leaving them with inadequate retirement income. This paper looks at recent benefit rule changes in the G7 countries to see what can be learned about such political risk in PAYG pension systems. From this small sample, I find that projections of rising costs under current rules are inducing reforms, and that these reforms often have a major impact on the present discounted value of promised benefits for middle-aged and younger workers. Usually, however, the benefits of the retired and those nearing retirement are protected. The phasing in of benefit cuts raises the question as to why younger workers are willing to take significant cuts in their implicit wealth while protecting the currently old. One possible answer is explored through a simple model: these workers fear even larger cuts in their benefits if the tax burden on future workers rises too high.
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Suggested Citation

  • John McHale, 2001. "The Risk of Social Security Benefit-Rule Changes: Some International Evidence," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 247-290 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:10596
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    1. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
    2. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, "undated". "Social Security Money's Worth," Pension Research Council Working Papers 98-9, Wharton School Pension Research Council, University of Pennsylvania.
    3. Laurence J. Kotlikoff, 1997. "It's high time to privatize," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 41(Jun), pages 293-296.
    4. Martin Feldstein & Andrew Samwick, 1998. "The Transition Path in Privatizing Social Security," NBER Chapters,in: Privatizing Social Security, pages 215-264 National Bureau of Economic Research, Inc.
    5. A. Javier Hamann, 1997. "The Reform of the Pension System in Italy," IMF Working Papers 97/18, International Monetary Fund.
    6. Richard Hemming, 1998. "Should Public Pensions be Funded?," IMF Working Papers 98/35, International Monetary Fund.
    7. Willi Leibfritz & Deborah Roseveare & Douglas Fore & Eckhard Wurzel, 1995. "Ageing Populations, Pension Systems and Government Budgets: How Do They Affect Saving?," OECD Economics Department Working Papers 156, OECD Publishing.
    8. Takayama, Noriyuki, 2005. "Pension Reform in Japan," Discussion Paper 253, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    9. János Kornai & John McHale, 2000. "Is Post-Communist Health Spending Unusual?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 369-399, July.
    10. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1.
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