TY - JOUR
T1 - Propagation and smoothing of shocks in alternative social security systems
AU - Auerbach, Alan
AU - Kueng, Lorenz
AU - Lee, Ronald
AU - Yatsynovich, Yury
N1 - Funding Information:
This research was supported by the U.S. Social Security Administration through grant #10-M-98363-1-01 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. We thank two anonymous referees for their helpful comments on earlier drafts. The findings and conclusions expressed are solely those of the authors and do not represent the views of SSA or any agency of the federal government.
Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2018/8
Y1 - 2018/8
N2 - 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.
AB - 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.
KW - Generational incidence
KW - Notional defined contribution systems
KW - Pay-as-you-go systems
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U2 - 10.1016/j.jpubeco.2018.05.012
DO - 10.1016/j.jpubeco.2018.05.012
M3 - Article
AN - SCOPUS:85048174035
SN - 0047-2727
VL - 164
SP - 91
EP - 105
JO - Journal of Public Economics
JF - Journal of Public Economics
ER -