Do Private Pensions Increase National Saving?

This paper discusses how private pension programs differ from public social security in their likely impact on aggregate saving. Although private pensions are likely to reduce direct saving by employees, this should be offset by the combination of companies' partial funding and the shareholders response to unfunded liabilities. In contrast to several earlier empirical studies that implied that social security does depress national saving, the current time series evidence suggests that the growth of private pensions has not had an adverse effect on saving and may have increased saving by a small amount.

Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration

With the existing "historic cost" method of depreciation, higher inflation rates reduce the real value of future depreciation deductions and therefore raise the real net cost of investment. The calculations in this paper show that this rise in the net cost can be quite substantial at recent inflation rates; e.g., the real net cost of an equipment investment with a 13 year tax life is raised 21 percent by an 8 percent expected inflation rate if the firm uses a 4 percent real discount rate. The effects of inflation on the net cost of investment can be completely eliminated by indexing depreciation. A more accelerated depreciation schedule can also lower the net cost of investment and make that net cost less sensitive to the rate of inflation. The current paper examines a particular acceleration proposal and finds that, for moderate rates of inflation and real discount rates, the acceleration proposal and full indexation are quite similar. For low rates of inflation, high discount rates, or very long-lived investments, the acceleration proposal causes greater reductions in net cost than would result from complete indexing. Conversely, for high rates of inflation, low discount rates, or very short-lived investments, the acceleration method fails to offset the adverse effects of inflation. Since the acceleration and indexation methods have quite similar effects under existing economic conditions, the choice between them requires balancing the administrative simplicity and other possible advantages of acceleration against the automatic protection that indexation offers against the risk of significant changes from the recent inflation rates and discount rates.

The Effect of Social Security on Private Savings: The Time Series Evidence

This paper reviews the studies by Robert Barro, Michael Darby, and Alicia Munnell, as well as my own earlier time-series study and presents new estimates using the revised national income-account data. The basic estimates of each of the four studies point to an economically substantial effect that is very unlikely to have been observed by chance alone. Although including variables like the Government surplus (Barro) or a measure of real money balance (Darby) can lower the estimated coefficient of the social security wealth variable, this paper explains their inappropriateness in the aggregate consumption function. Use of new data on national income and its components from the Department of Commerce improves my earlier estimates and shows that the unemployment variable does not belong in the consumption function once the level of income and its rate of change are included.

Social Security Benefits and the Accumulation of Preretirement Wealth

This paper uses a new and particularly well-suited body of data to assess the impact of social security retirement benefits on private savings. The Retirement History Survey combines survey evidence on the wealth of couples in their early sixties with detailed information from the administrative records of the Social Security Administration on the lifetime earnings of those individuals and the social security benefits to which they are entitled. The present paper uses these data to estimate a model of the determination of preretirement net worth. On balance, the estimates developed in this study favor the extended life cycle model as a theory of asset accumulation and indicate a substantial substitution of social security wealth for private wealth accumulation.

Why is Productivity Growing Faster?

Productivity in the United States has been growing faster in the past seven years than it did in the previous quarter century. U.S. productivity growth accelerated while that in Europe declined. This paper asks why U.S. productivity growth has been faster than in the past and than in Europe. An important reason for the faster growth has been the strong incentives for managers at all levels to make the kinds of changes that can raise productivity even if that involves personal risk and discomfort. These incentives became much stronger during the 1990s for reasons that I speculate about but do not begin to understand fully. The information technology developments in personal computers and in internet and intranet communications provided a powerful means to achieve the productivity gains that everyone was seeking. But even if the new IT opportunities had not come along, the combination of strong incentives and a receptive corporate climate would have led managers to find other ways to increase productivity, although undoubtedly not by as much. European firms had neither the incentive structure nor the corporate environment supportive of making change that could involve significant job changes and layoffs. Although Europe has higher unemployment rates, it is much more difficult to lay off workers in Europe than in the United States. Reorganizing white collar work to change job assignments and locations is also much easier in the U.S. than in Europe. The future is likely to see continued strong productivity growth and perhaps even increasing productivity growth in the United States if the incentives and corporate environments remain supportive. The prospects for Europe remain uncertain.

Tax Policies For the 1990's: Personal Saving, Business Investment, and Corporate Debt

Although the tax reforms of the 1980s substantially lowered the excess burden caused by high marginal tax rates, there were also significant adverse effects on incentives to save and to invest in business plant and equipment. Effective tax rates on. real capital gains and real net interest income remain very high because the tax rules do not recognize the difference between real and nominal magnitudes. These high effective tax rates discourage personal saving. The paper discusses a number of ways in which the tax law could be modified to encourage more saving and less borrowing. Existing tax rules bias corporate decisions in favor of debt finance relative to equity finance and in favor of investments in intangible assets (like advertising, consumer goodwill, and R and D) relative to investments in plant and equipment. The paper discusses the use of a cashflow corporate tax (with complete expensing of investment and no deduction for interest payments) as a way of remedying both of these biases in our current tax law.