Retirement Savings in an Aging Society: A Case for Innovative Government Debt Management

Aging societies will have to rely increasingly on private savings to finance retirement. The natural savings vehicles, stocks and bonds, are unfortunately lacking key risk-sharing features that are built into public retirement. Innovative government debt management can address this problem. The optimal policy supplies retirees with securities that share the financial risks of aggregate productivity, asset valuation, and demographic shocks across generations. As the population ages, state-contingent government bonds are a better risk sharing tools than pensions, which become too costly, or taxation, which raises time-consistency problems. Wage-indexed and longevity-indexed bonds in particular yield unambiguous efficiency improvements. To the extent that public pensions remain important, plans with wage-indexed defined benefits seem preferable to defined contributions or price-indexed plans. Capital income taxes and pension trust funds can play a supporting role for risk sharing.

The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk

The rapidly growing federal government debt has become a concern for policy makers and the public. Yet the U.S. government has seemingly unbounded access to credit at low interest rates. Historically, Treasury yields have been below the growth rate of the economy. The paper examines the ramifications of debt financing at low interest rates. Given the short maturity of U.S. public debt – over $2.5 trillion maturing in 2010 – investor expectations are critical. Excessive debts justify reasonable doubts about solvency and monetary stability and thus undermine a financing strategy built on the perception that U.S. debt is safe.

A Static Model for Voting on Social Security

This paper examines a static voting model for public pensions. The key premise is that families can internalize the cost and benefits of pay-as-you-go programs. A family realizes a net gain if its members collectively receive more in benefits in the current period than they pay in payroll taxes. Abstracting from differences in income, net benefits are positive if the family’s retiree-worker ratio exceeds the national average. If a sufficient fraction of retirees have a suitable number of working-age relatives—not too few and not too many—then a majority of voters belongs to families with above average retiree-worker ratios.social security, public pensions, voting model

Will Social Security and Medicare Remain Viable as the U.S. Population is Aging? An Update

Yes, subject to concerns about Medicare inefficiencies and potentially self-confirming skepticism. The U.S. social security system-broadly defined to include Medicare-faces significant financial problems as the result of an aging population. But demographic change is also likely to raise savings, increase wages, and reduce interest rates, and up to a point, a growing GDP-share of medical spending is an efficient response to an aging population. Thus viability is more a political economy than an economic feasibility issue. To examine the political viability of social security, I focus on intertemporal cost-benefit tradeoffs in a median voter setting. For a variety of assumptions and policy alternatives, I find that social security should retain majority support.

The Sustainability of Fiscal Policy in the United States

The paper examines the sustainability of U.S. fiscal policy, finding substantial evidence in favor. I summarize the U.S. fiscal record from 1792-2003, critically review sustainability conditions and their testable implications, and apply them to U.S. data. I particularly emphasize the ramifications of economic growth. A “growth dividend” has historically covered the entire interest bill on the U.S. debt. Unit root tests on real series, unscaled by GDP, are distorted by the series’ severe heteroskedasticity. The most credible evidence in favor of sustainability is the robust positive response of primary surpluses to fluctuations in the debt-GDP ratio.public debt, sustainability, primary surplus, unit root

Ownership Risk, Investment, and the Use of Natural Resources

The effect of insecure ownership on ordinary investment and on the exploitation of natural resources is examined. Insecure ownership is characterized as a positive probability that a typical asset or its future return will be confiscated. For empirical analysis, the probability of confiscation is modeled as a function of observable political attributes of countries, principally the type of government regime in power (democratic versus non-democratic) and the prevalence of political violence or instability. A general index of ownership security is estimated from the political determinants of economy wide investment rates, and then introduced into models of petroleum and forest use. Ownership risk is found to have a significant, and quantitatively important effect. Empirically, increases in ownership risk are associated with reductions in forest cover and with slower rates of petroleum exploration. Contrary to conventional wisdom, greater ownership risk tends to slow rates of petroleum extraction, apparently because the extraction process is capital intensive.

Voting and Nonlinear Taxes in a Stylized Representative Democracy

We derive median-voter results and study the shape of redistributional taxes when voters elect a candidate who imposes taxes to maximize own utility. Under general conditions, a median-productivity candidate is a Condorcet winner. The imposed tax function is nonlinear, may place high marginal rates on very low incomes, and may have an interval of negative marginal rates below the income of the winning candidate. Marginal rates are positive throughout, however, if non-redistributional spending or altruism toward the poor are great enough.

Precommitted Government Spending and Partisan Politics

This paper analyzes government commitments to ongoing spending programs that require future outlays. Spending commitments are important for understanding partisan politics because they constrain future governments. In a model with one government good, a “stubborn liberal” policy maker can use precommitted spending to prevent a later conservative government from imposing decisive spending cuts. In a model where parties differ about spending priorities, reelection uncertainty creates a permanent bias towards higher government spending and higher taxes.government spending, partisan politics, political economy, precommitment

Who Bears What Risk? An Intergenerational Perspective

Many governments promise pension and medical benefits to their elderly citizens. As the world is aging, the burden of retiree benefits is becoming painfully obvious. Uncertainty about the future makes planning for retiree benefits even more difficult. Who will suffer or gain financially if the future differs from what we expect? For example, we face tremendous uncertainty about the speed of technical progress, about medical costs, and about trends in fertility and longevity. Government policy determines not only the level of taxes and benefits, but also who bears the risk of unexpected changes. Traditionally, retirement programs largely exempted retirees from sharing risk: by making fixed, unconditional, promises, they necessarily imposed a more-than-proportional risk on younger cohorts and on future generations. We examine the impact of alternative tax, pension, and health care policies on different cohorts, to evaluate how existing policies shift risk across cohorts. We also assess whether there may be conditions under which such policies might be appropriate in the interest of general welfare, and where there may be scope for better policies. The analysis covers the fundamental sources of risk: productivity, fertility, longevity, health, and asset

Who Bears What Risk? An Intergenerational Perspective

Many governments promise pension and medical benefits to their elderly citizens. As the world is aging, the burden of retiree benefits is becoming painfully obvious. Uncertainty about the future makes planning for retiree benefits even more difficult. Who will suffer or gain financially if the future differs from what we expect? For example, we face tremendous uncertainty about the speed of technical progress, about medical costs, and about trends in fertility and longevity. Government policy determines not only the level of taxes and benefits, but also who bears the risk of unexpected changes. Traditionally, retirement programs largely exempted retirees from sharing risk: by making fixed, unconditional, promises, they necessarily imposed a more-than-proportional risk on younger cohorts and on future generations. We examine the impact of alternative tax, pension, and health care policies on different cohorts, to evaluate how existing policies shift risk across cohorts. We also assess whether there may be conditions under which such policies might be appropriate in the interest of general welfare, and where there may be scope for better policies. The analysis covers the fundamental sources of risk: productivity, fertility, longevity, health, and asset