Top-heavy load: Trouble ahead for social security systems, Introduction by Peter A. Diamond

Alternde Bevölkerung, Demographie, Soziale Sicherung, Bevölkerungsstruktur, EU-Staaten, Aging population, Demography, Social security, Demographic structure, EU countries

Pensions for an Aging Population

After presenting the Gruber-Wise analysis showing a strong effect on retirement of implicit taxes from pension rules, it is shown that there is no effect of these implicit taxes on unemployment. This supports the argument for avoiding high implicit taxes on continued work. Also discussed are methods for adjusting benefits and taxes for increases in life expectancy, with particular attention to increasing "the retirement age." Calculations are presented showing the decreases in benefits for an increase in the normal retirement age in the US and the years of service for a full benefit in France.

Taxes and Pensions

Pension benefit rules depend on individual history far more than taxes do, and age plays a much larger role in pension determination than in tax determination. Apart from some simulation studies, theoretical studies of optimal tax design typically contain neither a mandatory pension system nor the behavioral dimensions that lie behind justifications commonly offered for mandatory pensions. Conversely, optimizing models of pension design typically do not include annual taxation of labor and capital incomes. After spelling out this contrast and reviewing (and rejecting) zero taxation of capital income based on the Atkinson-Stiglitz and Chamley-Judd results, this article raises the issue of tax-favored retirement savings, a topic where the two subjects come together.pension, income tax, social security

Autobiography

My grandparents immigrated to the U.S. around the turn of the last century. My mother’s parents and six older siblings came from Poland. My father’s parents met in New York, she having come from Russia and he from Romania. My parents, both born in 1908, grew up in New York and never lived outside the metropolitan area. Both finished high school and went to work, my father studying at Brooklyn Law School at night while selling shoes during the day. When they married in 1929, my mother was earning $15 a week as a bookkeeper and my father,$5 a week as a novice lawyer.Search frictions;

Unemployment, Vacancies, Wages

Peter A. Diamond delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.Search frictions;

Social Security Investment in Equities in an Economy with Short-Term Production and Land

This paper explores the general equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or via private accounts. The analysis depends critically on heterogeneity in saving, in production, in assets, and in taxes. Under fairly general assumptions we show that limited diversification increases a neutral social welfare function, increases interest rates, reduces the expected return on short-term equity (and thus the equity premium), decreases safe investment and increases risky investment. However, the effect on aggregate investment, long-term capital values, and the utility of young savers hinges on delicate assumptions about technology. Aggregate investment and long-term asset values often move in the opposite direction. Thus social security diversification might reduce long-term equity value while it increases aggregate investment.Private accounts, trust fund, diversification, heterogeneity, overlapping generations

Improving Sweden's Automatic Pension Adjustment Mechanism

The public pension world has seen two innovations in recent years. One is the emergence of notional defined contribution (NDC) plans. The other is the introduction of automatic adjustment mechanisms to help keep pension systems solvent when the economy weakens. This brief looks at the Swedish system to demonstrate how NDCs work and evaluates the work­ings of the automatic adjustment mechanism in the wake of the 2008 financial crisis. Sweden passed reform legislation in 1994 that in­troduced a partially-funded NDC plan.1 The arrange­ment is conceptually similar to a defined contribution plan in that contributions are accumulated in indi­vidual accounts, but different in that the accounts are not fully funded and may be financed entirely on a pay-as-you-go basis. In this setting, the rate of return credited on the account assets is based on a rule rath­er than on actual returns. The Swedish system uses a notional interest rate equal to the rate of growth of average earnings. However, if a calculation suggests a potential deficit, the notional interest rate is auto­matically reduced through a “brake” mechanism. The recent financial crisis has highlighted ways in which the brake mechanism could be improved. This brief proceeds as follows. The first section describes Sweden’s NDC plan. The second describes the Swedish brake mechanism. The third describes two problems with the current adjustment procedure: 1) it creates the likelihood of large shocks for retir­ees; and 2) while disadvantaging retirees, it tends to advantage workers. The fourth section presents pos­sible fixes for the current problems. The final section concludes that the Swedish NDC plan could function more effectively with modest changes to the brake mechanism.