Unfunded Social Security Research Articles

Understanding Individual Account Guarantees

Demographic aging renders workers vulnerable to the inherent uncertainty of unfunded social security systems. This realization has set off a global wave of social security reforms, and numerous countries have now set up Individual Accounts (IA) plans in response. Strengths of IAs are that participants gain ownership in their accounts, and they also may diversify their pension investments; additionally, they produce a capitalized, funded system that enhances old-age economic security. While IAs reduce the risk participants face due to unfunded social security systems, participants holding capital market investments in IAs are exposed to fluctuations in the value of their pension assets. Concern over market volatility has prompted some to emphasize the need for guarantees' of pension accumulations. This paper offers a way to think about guarantees in the context of a social security reform that includes Individual Accounts. When a pension guarantee has economic value to participants, it will have economic costs. We illustrate how these costs can be important and vary significantly with time horizon, investment mix, and guarantee design. Our findings indicate that plan designers and budget analysts would do well to recognize such costs and identify how they can be financed.

Incentives to retire later – a solution to the social security crisis?

As one possible solution to the well-known financing crisis of unfunded social security systems, an increase in the retirement age is a popular option. To induce workers to retire later, it has been proposed to strengthen the link between retirement age and benefit level. The present paper is devoted to analyzing the long-run financial implications of such a reform. We show that with actuarial adjustments the long-run contribution rate is an increasing function of the retirement age chosen by workers. Moreover, the implicit tax paid to the pension system by a participant can increase in the long run if the retirement age rises in response to a ‘steep’ adjustment rule. In this sense, the proposed ‘cure’ may worsen the disease. Finally, we show how the negative effects can be avoided by forming a capital stock from the additional revenues due to later retirement.

Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete

This paper develops an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system can lead to a Pareto improvement, even if the initial equilibrium is neither production-ine±cient in the spirit of Diamond (1965) nor dynamically ine±cient in the spirit of Samuelson (1957). When returns to capital and wages are imperfectly correlated and subject to aggregate shocks, then the consumption variance of all generations can be reduced if private markets or government policies enable them to pool their labor and capital incomes. A social security system that endows retired households with a claim to labor income may serve as an e®ective tool to share aggregate risk between gener

Incentives to Retire Later - A Solution to the Social Security Crisis?

As one possible solution to the well-known financing crisis of unfunded social security systems, an increase in the retirement age is a popular option. To induce workers to retire later, it has been proposed to strengthen the link between retirement age and benefit level. The present paper is devoted to analyzing the long-run financial implications of such a reform. We show that with actuarial adjustments the long-run contribution rate is an increasing function of the retirement age chosen by workers. Moreover, the implicit tax paid to the pension system by a participant can increase in the long run if the retirement age rises in response to a steep adjustment rule. In this sense, the proposed cure may worsen the disease. Finally we propose an alternative adjustment scheme which avoids these negative consequences. Finally, we show how the negative effects can be avoided by forming a capital stock from the additional revenues, due to later retirement.

Mortality decline and long-run economic growth

This paper examines the impacts of mortality decline on long-run growth in a dynastic family, two-sector growth model with social security. A rise in longevity has direct effects on fertility, human capital investment, and growth, as well as indirect effects through increasing unfunded social security contributions. Both the direct and indirect effects depend on the relative strength of the tastes for the number and welfare of children and may have different signs. The net effects of rising longevity on fertility tend to be negative, but positive on human capital investment and growth.

Productivity Growth and the Political Economy of Social Security

The present paper provides an analysis of unfunded social securityas the outcome of a public decision making process in an endogenousgrowth economy. It employs a model in which there is a non-monotonic relationship beween productivity growth and the scale ofpublic intergenerational redistribution. The paper shows thatalthough unfunded social security need not harm growth in general,it is likely to harm growth in a democracy. This effect isreinforced by population aging.

Growth and social security: the role of human capital

This paper studies the growth and efficiency effects of pay-as-you-go financed social security when human capital is the engine of growth. Employing a variant of the Lucas model [Lucas, R.E., 1988. On the mechanics of economic development. Journal of Monetary Economics 22, 3–42.] with overlapping generations, it is shown that a properly designed, unfunded social security system leads to higher output growth than a fully funded one. Furthermore, the economy with an unfunded social security is efficient, while the other one is not. These results stand in sharp contrast to those obtained in models where the reason for economic growth is physical capital accumulation.

Kapitaldeckungs- versus Umlageverfahren

Abstract In the academic debate on systems of old-age insurance no question is as controversial and as vigorously discussed as the choice between funded and unfunded financing modes. At first glance this is surprising because this choice seems to involve only an efficiency problem. However, closer inspection reveals that a change of the financing system implies redistribution, if not within, at least among, different generations. In this contribution, the present state of knowledge on the functioning and the effects of the two financing systems is summarized. The analysis focuses on a comparison of rates of return and risks involved in each system and on the problems connected with a transition from unfunded to funded pensions. As a result it is argued that without reference to specific criteria of distributive equity among generations the nowadays popular call for radical reform of unfunded social security systems is not well founded.

Pay-as-you-go Social Security and the Distribution of Bequests

This paper studies the impact of an unfunded social security system on the distribution of bequests in a framework where savings are due both by life cycle and by random altruistic motivations. We show that the impact of social security on the distribution of bequests depends crucially on the importance of the bequest motive in explaining savings behavior. If the bequest motive is strong, then an increase in the social security tax raises the bequests left by altruistic parents. On the other hand, when the importance of bequests in motivating savings is sufficiently low, the increase in the social security tax could result in a reduction of the bequests left by altruistic parents under some conditions on the attitude of individuals toward risk and on the relative returns associated with private saving and social security. Some implications concerning the transitional effects of introducing an unfunded social security scheme are also discussed.

Growth effects of an unfunded social security system when there is altruism and human capital

We investigate the relationship between growth and an unfunded social security system in an overlapping generations model with joy-of-giving altruism where endogenous growth is driven by the accumulation of human capital. We show that an unfunded social security system financed with a tax on labor income can increase growth.

Pension Systems: A Comparative Perspective

With the retirement of the baby boom generation beginning in the first decade of the 21st century and increased global competition between rival systems of economic governance, pension systems are an important and growing area of research in economics and management. The relationships between social security (pillar I), sponsored pension and retirement plans (pillar II), and individual retirement income accounts (pillar III) are essential to any understanding of pension systems. There are significant differences between the Anglo-American world, much of continental Europe, and Latin America with respect to the structure of relationships between the three pillars of retirement income. Moreover, there are significant differences between whole sets of nations with respect to the current funding of future pension liabilities. While the Anglo-American countries do not all fully fund social security entitlements they do rely upon the full funding of pension fund (pillar II) obligations whereas continental European countries tend to rely upon unfunded social security (pillar I). These funding arrangements have had significant consequences for the financial management of large corporations, and for the structure of the related institutional investment industry. Anglo-American pension funds and the financial services industry have accelerated the process of financial dis-intermediation, in part contributing to the growth of the global market for corporate control. Even in countries not contemplating changing over to funded retirement income plans, the transformation of Anglo-American economies through the actions and investment strategies of pension funds has been noted. In particular, this transformation has not been lost on continental Europe and the transition economies of eastern Europe as they redefine their social security and pension systems in the light of the looming demographic crisis.

Social Security Reform with Heterogeneous Agents

This paper analyzes the quantitative role of idiosyncratic uncertainty in an economy in which rational agents vote on hypothetical social security reforms. We find that the role of a pay-as-you-go social security system as a partial insurance and redistribution device significantly reduces political support for a transition to an economy with a fully funded system. We conclude that the status quo bias in favor of an unfunded social security system is stronger in economies in which agents of similar age differ significantly with respect to labor earnings and wealth because of idiosyncratic income uncertainty. Journal of Economic Literature Classification Numbers: H55, E62, H3

Projected U.S. Demographics and Social Security

Without policy reforms, the aging of the U.S. population is likely to increase the burden of the currently unfunded Social Security and Medicare systems. In this paper we build an applied general equilibrium model and incorporate the population projections made by the Social Security Administration (SSA) to evaluate the macroeconomic and welfare implications of alternative fiscal responses to the retirement of the baby-boomers. Our calculations suggest that it will be costly to maintain the benefits at the levels now promised because the increases in distortionary taxes required to finance those benefits will reduce private saving and labor supply. We also find that the “accounting calculations” made by the SSA underestimate the required fiscal adjustments. Finally, our results confirm that policies with similar long-run characteristics have very different transitional implications for the distribution of welfare across generations. Journal of Economic Literature Classification Numbers: D52, D58, E21, E62.

Social Security in an Overlapping Generations Economy with Land

We use balance sheet and National Income and Products Accounts data to calibrate factor shares in a model with three factors (land, labor, and capital) and three sectors (business, household, and government). These estimates are used in an overlapping generations model with land to study the long-run implications for social security. In this setup, dynamic inefficiency is theoretically ruled out due to the presence of land as a fixed factor of production. Our numerical experiments suggest that in this setup the partial insurance benefit provided by an unfunded social security system is outweighted by the reduction in aggregate long-run consumption that accompanies such a system. This negative finding for social security seems to be robust to different parameterizations of the model economy. Journal of Economic Literature Classification Numbers: E2, E6, D52, C68.

Social security as an economic stabilization program

This paper analyzes the stabilizing properties of an unfunded social security system in an over-lapping generations model with cyclical equilibria. This provides a welfare rationale for a social security system independent of the windfall gained by the first generation, or social insurance arguments. An unfunded social security system redirects intergenerational resource transfers from private savings, which are subject to endogenous fluctuations, towards a public system with an implicit rate of return of unity. In an economy with a cycle of order 2, a planner with a limit-of-means social welfare function will completely stabilize the economy.

Privatizing Social Security: A Critical Assessment

The purpose of this paper is to provide a critical evaluation of theoretical models showing that shifting from pay-as-you-go to fully funded social security schemes can be made Pareto-improving. Further, it argues that what often makes a reform towards funded schemes attractive is a number of additional features that could also have been introduced in the unfunded social security system. The paper is organized in three main sections. The first one presents a taxonomy of social security systems; this allows us to show that in privatization programmes the issue is not just moving from unfunded to funded mechanisms but also, and above all, to individualize the system in such a way that there is no more redistribution. The second shows that funded and pay-as-you-go schemes are equivalent as long as the payroll taxes paid during the period of inception of the pay-as-you-go scheme are duly invested. Finally, the third section presents two models of Pareto-improving social security reforms and discusses the assumptions on which they rely.

Fiscal Policy in a Growth Model with Both Altruistic and Nonaltruistic Agents

This paper examines the long-run behavior of an overlapping generations model with a population consisting of altruistic and nonaltruistic agents. It also studies the effect of fiscal policy on aggregate capital accumulation and on the welfare of both types of agents. It shows that an increase in the relative number of nonaltruists is Pareto-improving in the steady state. It also shows that the introduction of public debt or unfunded social security has no effect on the longrun equilibrium but implies a transfer of resources from the nonaltruistic to the altruistic agents. Finally, it indicates that inheritance taxation hurts not only the altruists but also the nonaltruists.

Fiscal Policy in a Growth Model with Both Altruistic and Nonaltruistic Agents

This paper examines the long‐run behavior of an overlapping generations model with a population consisting of altruistic and nonaltruistic agents. It also studies the effect of fiscal policy on aggregate capital accumulation and on the welfare of both types of agents. It shows that an increase in the relative number of nonaltruists is Pareto‐improving in the steady state. It also shows that the introduction of public debt or unfunded social security has no effect on the long‐run equilibrium but implies a transfer of resources from the nonaltruistic to the altruistic agents. Finally, it indicates that inheritance taxation hurts not only the altruists but also the nonaltruists.

Die Rolle der Vermögenspolitik im Rahmen einer Sozialstaatsreform / The Distribution of Wealth and Welfare State Reform

Zusammenfassung Angesichts der gegenwärtigen Krise des umlagefinanzierten Systems sozialer Sicherung wird im politischen wie wissenschaftlichen Bereich verstärkt gefordert, die staatliche Sozialversicherung durch Maßnahmen der privaten Vermögensbildung zu ergänzen. Vor diesem Hintergrund untersucht der vorliegende Beitrag die Notwendigkeit der Förderung der privaten Vermögensbildung und analysiert das vermögenspolitische Instrumentarium auf seine wirtschafts- und sozialpolitische Effizienz. Die Analyse der Verteilung der materiellen Vermögenswerte zeigt, dass die nach wie vor hohe Disparität der personellen und sozioökonomischen Vermögensverteilung eine Förderung der Vermögensbildung unterer Einkommensbezieher und Familien erforderlich macht. Eine zielkonforme Reform des vermögenspolitischen Instrumentariums müsste jedoch die Förderung verstärkt als Einstiegsförderung ausgestalten und weitgehende Wahlfreiheit zwischen verschiedenen Anlagealternativen gewährleisten. Eine staatliche Förderung von Arbeitnehmerkapitalbeteiligungen oder investiven Entlohnungsformen erweist sich demgegenüber als wirtschafte- und sozialpolitisch verfehlt.

Retirement in an overlapping generations model

SummaryWith an overlapping generations model, Williamson and Jones [1983] demonstrated that the long-run savings ratio in the U.S. was not affected by the introduction and the reform of the unfunded social security system. This paper extends their model by including a production sector, endogenous labor supply and a wage profile. Simulations show that incorporating general equilibrium and (exogenous) leisure is sufficient to generate a declining savings ratio in the steady state. Reforms of the social security system are evaluated in welfare terms. The new features of the model may significantly change the sign and the magnitude of the welfare gains for steady state generations.