Privatizing U.S. Social Security: some possible effects on intergenerational equity and the economy

Social security ; Privatization

From Deficit Delusion to the Fiscal Balance Rule: Looking For an Economically Meaningful Way to Assess Fiscal Policy

Notwithstanding its widespread use as a measure of fiscal policy, the government deficit is not a well-defined concept from the perspective of neoclassical macro economics. From the neoclassical perspective the deficit is an arbitrary accounting construct whose value depends on how the government chooses to label its receipts and payments. This paper demonstrates the arbitrary nature of government deficits. The argument that the deficit is not well-defined is first framed in a simple certainty model with nondistortionary policies, and then in settings with uncertain policy, distortionary policy, and liquidity constraints. As an alternative to economically arbitrary deficits, the paper indicates that the "Fiscal Balance Rule" is one norm for measuring whether current policy will place a larger or smaller burden on future generations than it does on current generations. The Fiscal Balance Rule is based on the economy's intertemporal budget constraint and appears to underlie actual attempts to run tight fiscal policy. It says take in net present value from each new young generation an amount equal to the flow of government consumption less interest on the difference between a) the value of the economy's capital stock and b) the present value difference between the future consumption and future labor earnings of existing older generations. While the rule is a mouth-full, one can use existing data to check whether it is being obeyed and, therefore, whether future generations are likely to be treated better or worse than current generations.

Is the United States bankrupt?

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation's economic future. The paper offers three policies to eliminate the nation's enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.Bankruptcy

Intergenerational Transfers and Savings

In recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis. The key question stimulating this research is what is the main explanation for savings? Is it primarily accumulation for retirement as claimed by Albert Ando, Richard Brumberg, and Franco Modigliani in their celebrated Life Cycle Model of Savings? Is it primarily intentional accumulation for intergenerational transfers? Or is it primarily precautionary savings, much of which may be bequeathed because of imperfections in annuity markets? This paper examines a range of findings on the importance of intergenerational transfers. The strong conclusion that emerges from this evidence is that intergenerational transfers play a very important, if not a key, role in aggregate wealth accumulation. While intergenerational transfers figure very large in savings, the precise motivation for such transfers is unclear. Intergenerational altruism might appear the most likely candidate, but at least sane stylized facts, such as the equal allocation of bequests among children, are strongly at adds with the altruism model. Other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed. Sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise.

Is Debt Neutral in the Life Cycle Model?

This paper questions the widely accepted view that deficits have real effects in the life cycle model. Standard analyses of deficits within life cycle models treat the government as a dictatorial entity that can effect any intergenerational redistribution it desires. In contrast, this paper drops the assumption of compulsion and models the government as a coalition of self-interested young and old generations whose bargaining determines government decisions. Since each generation is selfish, no generation will voluntarily absorb the debts of another except as a quid pro quo for receiving particular goods or services. Hence, redistribution per se between generations will not arise. Because each generation is ultimately responsible for its own liabilities, deficit finance, while altering the timing of tax receipts, has no economic impact.

Health Expenditures and Precautionary Savings

The precautionary motive for saving is an important issue that is receiving increasing attention. Part of the motivation for this interest stems from the post war coincidence of two trends, one a decline in the U.S. rate of saving and the other an increase in insurance of various types, including unemployment insurance, annuity insurance, disability insurance, and health insurance. This paper examines precautionary saving for uncertain health care payments using a simple two period and illustrates this model's theoretical insights through simulations of a 55 period life cycle model. While derived from a highly stylized model, the simulations give the impression that precautionary saving for uncertain health expenditures could explain a large amount of aggregate savings. Adding uncertain health expenditures to the model's economy raises long run savings by almost one third, assuming individuals self insure. Arrangements for insuring uncertain health expenditures also have potentially quite sizable effects on savings. Introducing actuarially fair insurance to the economy with uncertain health expenditures reduces the steady state level of wealth of that economy by 12 percent. Switching from the fair insurance arrangement to a Medicaid-type program with an asset test further reduces steady state wealth by 75 percent.

Estimating The Age-Productivity Profile Using Lifetime Earnings

Understanding how productivity varies with age is important for a variety of reasons. A decline in productivity with age implies that aging societies must increasingly depend on the labor supply of the young and middle age. It also means that policies designed to keep the elderly in the work force, while potentially good for the elderly, may decrease overall productivity. A third implication is that, absent government intervention, employers may not be willing to hire the elderly for the same compensation as younger workers. Labor economists are particularly interested in the relationship of productivity and age because it can help test alternative theories of the labor market. This paper assumes risk neutral employers and estimates the age-productivity relationship using the first order condition that the present expected value of total compensation equals the present expected value of productivity; workers hired at different ages have different present expected values of total compensation, and, correspondingly, different present expected values of productivity. Hence, if one parameterizes the age-productivity relationship, the parameters of this relationship can be identified from information on how total present expected compensation varies with age. The data in the study are earnings histories for over three hundred thousand employees of a Fortune 1000 corporation covering the period 1969-1983. While the results may be subject to several biases and should be viewed cautiously, they are fairly striking. For each of the five sex-occupation groups, productivity falls with age. For young workers, compensation (earnings plus pension accrual) is below productivity and for older workers compensation exceeds productivity. For several worker groups the discrepancy between compensation and productivity is very substantial. In addition to confirming some features of contract theory, the results lend support to the bonding models of Becker and Stigler and Lazear which suggest that firms use the age-earnings profile as an incentive device.

The equity of social services provided to children and senior citizens

A consideration of the degree of equity in the U.S. government's treatment of children vis-a-vis adults, particularly the elderly. The authors show that given current policy, today's and tomorrow's children could end up paying as much as 70 percent of their lifetime income to the government, whereas the current elderly will pay only about 25 percent on average.Social service