SocialSecurityLecture

SocialSecurityLecture - 1 Social Security: Outline...

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Unformatted text preview: 1 Social Security: Outline Generational accounting Rationale for govt provision of annuities Fully-funded v. PAYG systems Simple OLG framework for analyzing SS Legacy Debt SS Trust Fund Privatization Current reform proposals Diamond and Orszag 2 Generational Accounting How meaningful are “deficits” as conventionally measured? Suppose the following cash flows occur: 3 Generational Accounting How meaningful are “deficits” as conventionally measured? Suppose the following cash flows occur: Individual Govt $1.03 in period 2 $1 in period 1 4 Generational Accounting How meaningful are “deficits” as conventionally measured? Alternative labels: Individual Govt $1.03 “transfer payment” in period 2 $1 “tax” in period 1 5 Generational Accounting How meaningful are “deficits” as conventionally measured? Alternative labels: Individual Govt $1.03 “repayment” in period 2 $1 “loan” in period 1 6 Generational Accounting How meaningful are “deficits” as conventionally measured? Alternative labels: Individual Govt $9 “transfer payment” in period 1 and $1.03 “transfer payment” in period 2 $10 “tax” in period 1 7 Generational Accounting How meaningful are “deficits” as conventionally measured? Alternative labels: Individual Govt $9 “repayment” in period 1 and $1.03 “repayment” in period 2 $10 “loan” in period 1 8 Generational Accounting These labels are arbitrary, but they affect the measured deficit: No deficit Individual Govt $1.03 “transfer payment” in period 2 $1 “tax” in period 1 9 Generational Accounting These labels are arbitrary, but they affect the measured deficit: $1 deficit in period 1 Individual Govt $1.03 “repayment” in period 2 $1 “loan” in period 1 10 Generational Accounting Because conventional deficits are arbitrary, Auerbach, Gokhale and Kotlikoff propose a new system of “generational accounts” Quantifies the tax burden of each generation, using its net lifetime tax rate 11 Net Lifetime Tax Rate e.g. in our OLG example, net lifetime tax rates are: A: -10% B: 10% me PretaxInco Received) Transfers- Paid (Taxes = 12 13 15 Rationale for Govt. Provision To insure against the risk associated with uncertainty about the time of death, you need an annuity But, there may be market failure in the private annuities market due to adverse selection → Rationale for government provision of retirement income 16 Rationale for Govt. Provision Thus, many govt’s (including the US) have established some form of public provision of retirement income There are 2 types of programs: Fully-funded “Pay-as-you-go” (PAYG) 17 Fully-Funded Programs Workers contribute to the program during their working life These contributions are invested in assets (stock, bonds etc) At retirement, a worker receives the accumulated value of her contributions...
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This note was uploaded on 04/08/2008 for the course ECON 253 taught by Professor Damika during the Spring '08 term at UConn.

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SocialSecurityLecture - 1 Social Security: Outline...

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