Finding a Way Out of America's Demographic Dilemma

Notwithstanding the rosy short-term fiscal scenarios being advanced in Washington, the demographic transition presents the United States with a very serious fiscal crisis. In 30 years there will be twice the number of elderly, but only 15 percent more workers to help pay Social Security and Medicare benefits. A realistic reading of the government demographic projections suggests a two thirds increase in payroll tax rates over the next three to five decades. However, these forecasts ignore macroeconomic feedback effects. In particular, they ignore the possibility that the nation will have more capital per worker as the number of elderly wealth-holders rises relative to the number of young workers. More capital per worker would mean higher worker productivity, higher real wages, and the lower return to capital that worries Wall Street. It would also mean a bigger payroll tax base and a smaller rise in tax rates. On the other hand, a higher payroll tax will leave workers with less after-tax income out of which to save and, therefore, fewer retirement assets than would otherwise be the case. Thus capital deepening is not a foregone conclusion. This study develops a dynamic general equilibrium life-cycle simulation model to study these conflicting forces. The model is the first of its kind to admit realistic patterns of fertility and lifespan extension. It also features heterogeneity, within as well as across generations, and, thus, can be used to study both intra- and intergenerational equity. Unfortunately, our baseline demographic simulation, which assumes the continuation of current social security policy, shows deteriorating macroeconomic conditions that will exacerbate, rather than mitigate, our fiscal problems. Real wages per effective unit of labor fall 4 percent over the next 30 years and 10 percent over the century. For Wall Street, this bad news about real wages is good news about the real return on capital, which rises 100 basis points by 2030 and 300 basis points by 2100. The model's gradual capital shallowing reflects the concomitant major rise in tax rates. In 2030, payroll tax rates and average income-tax rates applied to wages are 77 and 9 percent higher, respectively, than in 2000. Together, these tax hikes raise

Provenance Views for Module Privacy

Scientific workflow systems increasingly store provenance information about the module executions used to produce a data item, as well as the parameter settings and intermediate data items passed between module executions. However, authors/owners of workflows may wish to keep some of this information confidential. In particular, a module may be proprietary, and users should not be able to infer its behavior by seeing mappings between all data inputs and outputs. The problem we address in this paper is the following: Given a workflow, abstractly modeled by a relation R, a privacy requirement \Gamma and costs associated with data. The owner of the workflow decides which data (attributes) to hide, and provides the user with a view R' which is the projection of R over attributes which have not been hidden. The goal is to minimize the cost of hidden data while guaranteeing that individual modules are \Gamma -private. We call this the "secureview" problem. We formally define the problem, study its complexity, and offer algorithmic solutions

Stochastic Optimal Control Modeling of Debt Crises

What is an optimal or a sustainable external debt - for a country, region or sector? How should one monitor and evaluate debt to preclude a crisis? We use stochastic optimal control/dynamic programming to derive an optimal debt. The deviation of the actual from the optimal will serve as a Warning Signal of a crisis. There is a correspondence between Hamilton-Jacobi-Bellman equation of Dynamic Programming and the static Mean-Variance (M-V) analysis in finance. A graphic analysis of M-V is helpful to explain the implications of DP. An explicit example is the US Agricultural debt crisis.stochastic optimal control, debt, international finance, US agricultural crisis, Mean-Variance analysis, Hamilton-Jacobi-Bellaman equation

Aging, pension reform, and capital flows: A multi-country simulation model

In this paper, we present a quantitative analysis of the international capital flows induced by differences in population aging processes across countries and by pension reforms. In the vast majority of countries, demographic change will continue well into the 21st century. It is well known that within each country, demographic change alters the time path of aggregate savings, even more so in countries where fundamental pension reforms and shifts towards more pre-funding are implemented. While the patterns of population aging are similar in most countries, the timing differs substantially, in particular between industrialized and less developed countries. To the extent that capital is internationally mobile, population aging will therefore induce capital flows between countries. In order to quantify these effects, we develop a stylized multi-country overlapping generations model, and we use long-term demographic projections for several world regions to simulate international capital flows over a 50 year horizon. Our simulations suggest that capital flows from fast-aging industrial countries such as Germany to the rest of the world will be substantial. Closed-economy models of pen-sion reform are likely to miss quantitatively important effects of international capital mobility.

Dropping Out of Social Security

The liability facing a pay-as-you-go social security system can be calculated in several ways. The exact liability measure chosen can significantly affect the conversion of a public pay-as-you-go system to a system based on individually funded accounts. Most conversions, including that which took place in Chile, as well as in many plans to convert the US system, assume the largest measure, known as the “shutdown liability.” That measure pays many workers who have contributed to the public system more money than the public system is actually worth to them, thereby placing a larger burden on future generations. Other liability measures, though, are hard to implement due to an information asymmetry between the government and individuals about an individual’s skill level. This paper demonstrates that a very simple reform plan –– simply letting people drop out of social security –– generates a truthful revelation equilibrium in which agents reveal private information about their skill level. The new assumed liability measure can be as little as half of the shutdown liability as the new measure more accurately assigns a liability for each individual based on their true value of remaining in social security. A smaller liability, therefore, is passed to future generations which also generates quicker transition paths. Moreover, interestingly, the drop out method also does a better job of protecting the welfare of the initial elderly when general revenue is used to pay for the transition. Simulation evidence is provided using a large-scale lifecycle simulation model that allows for heterogeneous skill levels. The evidence demonstrates the importance of the dropping out approach relative to the traditional conversion method that assumes the shutdown liability.

Pension Systems and their Influence on Fertility and Growth

This paper studies the implications of di¤erent public pension systems on fertility and economic growth. Employing a three period overlapping gener- ations endogenous growth model we compare the di¤erent impacts of pay-as- you-go-, fully funded- and informal pension systems. The novelty of our work lies in the formulation of altruism that is assumed to be one sided (descending) for economies represented by a public pension system and two sided (descend- ing and ascending) for economies with informal pension systems. Through the incorporation of a mixed procreation motive we can study the case of fully crowded out intrafamilial transfers inside a public pension system model while still capturing fertility endogenously. We show that the introduction of public pension systems to a developing economy reduce fertility and stimulate economic growth. Through a comparison of the di¤erent public pension systems we highlight that a fully funded pension system results in higher economic growth compared to a pay-as-you-go one despite higher fertility because the growth enhancing e¤ect of the higher capital stock is dominant. This suggests that observed fertility and growth di¤erences between the US and Europe can partly be explained by the di¤erent types of pension systems.