Effects Of Social Security Reform Research Articles

Distributional effects of social security reforms: The case of France

AbstractThis paper assesses the impact of two social security reforms using a calibrated, dynamic life cycle model. It quantifies the long‐run distributional impact of two sets of reforms in France: (1) the 2013 reform of Prime Minister Ayrault, which modified the parameters of a defined benefit (DB) plan, and (2) a hypothetical reform that changes the system to a notional defined contribution (NDC) plan, similar to that in Italy. First, on aggregate welfare, the Ayrault reform and the hypothetical switch to NDC yield contrasting results. The Ayrault reform improves aggregate welfare, which is not the case for the NDC reform. Welfare comparisons are made with respect to the “benchmark economy,” where increases in life expectancy occur and are dealt with only through a higher contribution rate. Second, both reforms yield unequal distributions of welfare changes, with low‐skill workers on the losing end. Under the Ayrault reform, low‐skill workers delay retirement by two years, to age 62. Under NDC reform, pensions for low‐skill workers fall substantially as inequalities during the work life translate directly into inequalities in pensions. The switch to an NDC scheme leads to a more unequal society in terms of asset and welfare distribution.

Social Security Reform and Personal Saving: Evidence from Brazil

The population aging process has caused a financial imbalance in the social security systems of countries based on pay as you go system, as is the case in Brazil. To face this challenge, the Brazilian governments have undertaken several reforms since the 1988 Constitution. Confronting the life cycle hypothesis, the aim of this paper is to estimate the causal effects of Social Security Reforms on the Likelihood of Saving in Brazil by exploring two exogenous events, the 41th (of 2003) and 47th (of 2005) Constitutional Amendments, that reduced the expectations of benefits only for public servants. Using data from the House Budget Surveys, the results of differences-in-differences models show that the reform increased in a range of 2.1 to 2.9 percentage points in the probability of saving of the treated group. The results are in line with the recent literature indicating that reforms contribute to an increase in personal savings.

Effects of Social Security Reform on Private and National Saving

Social Security is the largest federal government spending program and one of the most popular. The earmarked payroll taxes that finance Social Security currently exceed benefit payments. By the end of 1996, the Social Security trust fund had accumulated about $566 billion in assets and was expected to grow to over $1.2 trillion by 2010. However, longer-term projections suggest that Social Security will face financial shortfalls. Using intermediate assumptions, the Social Security Trustees’ Report (1997) projects that benefit payments will exceed program revenue (payroll tax receipts plus interest income) beginning in 2019. Trust fund balances will then start to decline as reserves are liquidated in order to meet the payments due. In the absence of programmatic changes, full benefits will not be paid on time beginning in 2029. The actuarial deficit over the prescribed 75-year projection period is estimated to be 0.84 percent of GDP; this represents a combination of surpluses in early years and deficits in subsequent years. No official estimate of the actuarial deficit beyond the 75-year horizon has been made, and certainly major uncertainties accompany any distant forecasts, but it appears likely that the system will continue to fall further out of balance.

Labor supply elasticity and social security reform

Previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution (IES) in labor. In this paper, we show that the effects of social security reforms on aggregate labor supply are invariant to plausible values of the IES, but the effect of such reforms on the profile of hours over the life-cycle is highly sensitive to the IES. We first establish these results analytically in a simple partial-equilibrium setting and then demonstrate their robustness in a general equilibrium model calibrated to match key U.S. macroeconomic indicators. We find that the aggregate effects are similar regardless of the wide range of the values of IES used in calibrated economies. However, social security reform leads to a large reallocation of hours worked over the life-cycle, from early years to later working years, and the size of this reallocation significantly increases with the IES.

Examining the Interaction between Saving and Contributions to Personal Pension Plans: Evidence from the BHPS*

AbstractThis paper analyses the effects of social security reforms on saving in Britain. We use the British Household Panel Survey to investigate the interactions between voluntary additional contributions to personal pension plans (PPP) and saving in conventional forms. In particular, we test whether contributions to the PPP crowd out saving or constitute additional saving. Results suggest that not only have private pension schemes not crowded out private saving, but actually they have increased it too.

Capital–skill complementarity and the redistributive effects of Social Security Reform

This paper analyses the general equilibrium implications of reforming pay-as-you-go pension systems in an economy with heterogeneous agents, human capital investment and capital–skill complementarity. It shows that increasing funding, by raising savings, delivers in the long run higher physical and human capital and therefore higher output, but also higher across-group wage and income inequality. It also shows that the general equilibrium effects induced by this reform affect groups' sizes in a way that the higher across-group inequality generated by more funding goes with a larger share of the population against redistribution.

Behavioral Effects of Social Security Reform in a Dynamic Micro-Simulation with Life-Cycle Agents

The Congressional Budget Office Long-Term (CBOLT) model uses dynamic micro-simulation to analyze Social Security policy. The version of CBOLT currently being used to analyze policy for the Congress incorporates micro behavioral effects insofar as agents alter their timing of initial claiming of Old Age Insurance (OAI) worker benefits when benefits change, and that has a direct impact on government outlays and a feedback on the macro economy through changes in labor supply. However, the change in benefit claim age is only one of three behavioral responses that could be considered in Social Security analysis - the other two are labor supply (before or after claim age) and saving behavior. This paper develops a structural life-cycle model in which agents make choices over all three margins. Because the structural model is developed using the same stochastic processes in CBOLT's micro-simulation, the state-dependent behavioral rules obtained from solving the life-cycle model can be used to determine behavior in a CBOLT baseline or reform-analysis simulation.

Assessing the Maintenance of Savings Sufficiency Over the First Decade of Retirement

The adequacy of retirement savings is central to the U.S. debate over the effects of Social Security reform and pension changes that would place greater responsibility on individuals for accumulation of retirement resources. We contribute to this discussion by examining the extent to which individuals maintain initial levels of resources over the first decade of retirement. We compare annuitized wealth, including Social Security and pension wealth, to two consumption standards - a household's preretirement earnings and the poverty threshold. We analyze the relationship of individual characteristics to changes in this ratio over time, including the effects of widowhood and post-retirement work.

Fiscal Effects of Social Security Reform in the United States

Social Security is the largest social insurance program in the U.S., and has been shown to be a major determinant of the labor supply decisions of older workers. As such, reforming the Social Security system can have two fiscal impacts: a mechanical effect through changing the rules on benefits entitlements or taxation, and a effect through individual responses to these changes in benefits or taxes. We build a simulation model that computes these effects for major reforms to the system, building on estimated retirement responses to changing net Social Security entitlements. We then estimate the fiscal impact of reform for the 1931-1941 cohort of workers represented by the Health and Retirement Survey. We find that raising the early and normal retirement age by three years would reduce net costs for this cohort by roughly 30%, and that moving to a much higher benefit level would raise net costs by roughly 55%. Importantly, we find that in both cases the behavioral impacts on net costs are relatively small, at most one-third, and generally less than one-fifth of the total. The reason for these small effects is that the U.S. Social Security system is roughly actuarially fair, so that delaying or inducing retirement has relatively little impact on system balances; most of the effects that do arise are due to changes in general income and consumption taxes.

Capital-Skill Complementarity and the Redistributive Effects of Social Security Reform

This Paper analyses the general equilibrium implications of reforming pay-as-you-go pension systems in an economy with heterogeneous agents, human capital investment and capital-skill complementarity. It shows that increasing funding in the long-run delivers higher physical and human capital and therefore higher output, but also higher wage and income inequality. The latter affects preferences over the degree of redistribution of the remaining pay-as-you-go component: Despite the greater role that redistribution could perform in the new steady state, we find a preference for lower redistribution for a larger group of the population.

Gender Effects of Social Security Reform in Chile

In 1981 Chile replaced a mature government‐run social security system that operated on a pay‐as‐you‐go basis with a privately managed system based on individual retirement accounts. The new system is more fiscally sustainable because pension benefits are defined by contributions. The minimum pension guaranteed to beneficiaries with at least 20 years is funded from general taxes, preserving the tight matching between contributions and benefits. The new system also eliminates several cross‐subsidies. Men and women with less than secondary education gain under the new system, but single women with more education lose. Comparison of the old and the new systems reveals a complex set of factors that cause gender effects given constant behavior or change behavior across genders.

Consumer Behavior in the United States: Implications for Social Security Reform

This article shows theoretically and empirically that an aggregate Euler equation relates the growth rate of per capita consumption to the real interest rate, the ratio of private wealth plus asset income to consumption, and the ratio of social security wealth to consumption. Using the estimated Euler equation, the paper then calculates the steady‐state effects of social security reform. Reforms that reduce the ratio of social security wealth to consumption are found to shift the balanced growth paths for the capital stock, output, and consumption upward appreciably.

The Effects of Social Security Reform on Saving, Investment, and the Level and Distribution of Worker Well-Being

All observers agree that Social Security reform is needed restore the program's solvency. This paper examines the impact of alternative reforms on Social Security finances, on the wider U.S. economy, and on workers who contribute to and receive benefits from the program. In one reform we consider, Social Security benefits are eventually reduced about one-third so that benefits can be financed with the present 12.4 percent payroll tax rate. Workers are required to contribute an additional 2 percent of their wages to a new defined-contribution pension. We embed Social Security's finances in a neoclassical growth model and show how additions to Social Security and defined-contribution pension reserves, if they are saved, can increase the future growth of productivity and wages and reduce the rate of return on capital. These economy-wide impacts in turn affect the lifetime wages and pensions of workers born in successive generations. They have differing effects on workers depending on workers' relative earnings and the trend in their earnings over their careers. Our model includes a microsimulation component to measure these effects on individual workers. Our findings suggest that scaling back traditional Social Security and replacing part or all of it with defined-contribution pensions can potentially increase national saving over a very lengthy horizon, thus lifting the domestic capital stock and wages. The potential benefits are larger for high-wage workers than for average- and low-wage workers. Because of the potential impact of this reform on the U.S. capital-labor ratio, real capital returns might be adversely affected by this reform, reducing the rate of return workers will obtain in their defined-contribution pension accounts. Our results also imply that generations which will retire before about 2035 would enjoy higher lifetime pensions and net incomes under a policy that maintains Social Security benefits with tax hikes. That is, generations that will retire over the next 30 or 40 years would be better off under a policy that preserves Social Security through tax hikes than under a policy that scales back benefits and partially replaces them with benefits from a new defined-contribution system.

The Effects of Social Security Reform on Private Pensions

Among the far-reaching effects of Social Security reform on the rest of the economy is the impact on private pensions. This paper develops a model of pension plan design that incorporates heterogeneity in tastes for saving and sorting of workers in the labor market. The model is used to analyze the likely effects of a range of Social Security reform proposals on the design of employer-provided pensions. Several reform options are shown to change the relative benefits received by high- and low-income workers and to affect the ability of pension plan sponsors to comply with nondiscrimination rules for the distribution of pension contributions and benefits.

On the Distributional Effects of Social Security Reform

How will the distribution of welfare, consumption, and leisure across households be affected by social security reform? This paper addresses this question for social security reforms with a two-tier structure by comparing steady states under a realistic version of the current U.S. system and under the two-tier system. The first tier is a mandatory, defined-contribution pension offering a retirement annuity proportional to the value of taxes paid, whereas the second tier guarantees a minimum retirement income. Our findings, which are summarized in the Introduction, do not in general favor the implementation of pay-as-you go versions of the two-tier system for the U.S. economy. Journal of Economic Literature Classification Numbers: D3, E6.

A Time-Series Analysis of Self-Employment in the United States

In the early 1970s the proportion of the nonagricultural labor force self-employed in the United States ceased its downward trend and has been rising ever since. This study provides an analysis of the causes of this change. A general-equilibrium model of self- employment and wage employment is analyzed, and aggregate U.S. time- series data are used to test predictions derived from the model. The empirical analysis indicates that changes in technology, industrial structure, tax rates, and social-security retirement benefits have contributed to the reversal of the previous downward trend, which had persisted for over a century. Copyright 1987 by University of Chicago Press.

The effects of social security reforms on retirement ages and retirement incomes

Recent changes legislated in the U.S. Social Security system have altered the economic incentives to work and retire. Some older workers will respond to these new incentives by retiring at different ages. This paper evaluates the signs and magnitudes of these responses. Four specific changes in the structure of Social Security benefits are examined: raising the normal retirement age, delaying the cost-of-living adjustment, lowering early retirement benefits, and increasing late retirement payments. Behavioral parameters are estimated using an ordered logit model of retirement ages; these are used to predict how retirement behavior might respond to each of the four reforms. Predicted changes in retirement ages will be too small to compensate retirees for reductions in benefit formulas. Thus, the Social Security's financial burden will be eased, but retirees' incomes will fall on average.

Social Security and Private Saving: Reply

I am embarrassed by the programming error that Dean Leimer and Selig Lesnoy uncovered but grateful to them for the care with which they repeated my original study (Feldstein 1974). They set an admirable example of the tradition of replication on which all scientific work ultimately rests. As economic research increasingly involves large and complex computer programs to analyze macroeconomic data sets or to simulate models that cannot be solved analytically, replication studies like that of Leimer and Lesnoy ("Social Security and Private Saving: New Time-Series Evidence," in this issue) should become increasingly important. In their comment, Leimer and Lesnoy also suggest a variety of modifications to the social security wealth variable to incorporate alternative employee perceptions and actuarial assumptions. As I explain below, I have strong doubts about the appropriateness of these modifications. I therefore do not agree with their conclusion that "the time-series evidence does not support the hypothesis that the introduction of social security has substantially reduced personal saving in the United States." More specifically, as I show in this reply, correcting the computerprogramming error and reestimating the original equation for the original sample period produces results that are not substantially different from the results that were originally published in 1974. The point estimate of the coefficient of social security wealth implies that the level of social security wealth in the final year of the sample (1971) depressed personal saving by an amount equal to 44 percent of the actual personal saving in that year. Although the estimated coefficient of the social security wealth variable is smaller than in the original version and its standard error larger, the conventional statistical test