Propagation and smoothing of shocks in alternative social security systems

Alan Auerbach*, Lorenz Kueng, Ronald Lee, Yury Yatsynovich

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model. We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U.S. system as a unifying framework, in which we vary how much taxes and benefits adjust, and which we then compare to the existing German and Swedish systems. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U.S. system best smooth productivity shocks, which are by far the most important shocks. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U.S. system, reliance solely on tax adjustment fares best for mortality and migration shocks, while equal reliance on tax and benefit adjustments is best for fertility shocks.

Original languageEnglish (US)
Pages (from-to)91-105
Number of pages15
JournalJournal of Public Economics
Volume164
DOIs
StatePublished - Aug 1 2018

    Fingerprint

Keywords

  • Generational incidence
  • Notional defined contribution systems
  • Pay-as-you-go systems

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this