A positive theory of social security

In this paper I make two points. First, I argue that social security programs around the world link public pensions to retirement: people do not lose their pensions if they make a million dollars a year in the stock market, but they do confront marginal tax rates of up to 100 percent if they choose to work. Second, after arguing that most existing theories cannot explain this fact, I construct a positive theory that is consistent with it. The main idea is that pensions are a means to induce retirement—that is, to buy the elderly out of the labor force because aggregate output is higher if the elderly do not work. This is modeled through positive externalities in the average stock of human capital: because skills depreciate with age, the elderly have lower-than-average skill and, as a result, have a negative effect on the productivity of the young. When the difference between the skill level of the young and that of the old is large enough, aggregate output in an economy where the elderly do not work is higher. Retirement is desirable in this case, and social security transfers are the means by which such retirement is induced. The theory developed in this paper is also shown to be consistent with a number of other regularities documented in Section 1.     

Social security and economic integration

This letter analyzes the impact of economic integration on capital accumulation and capital flows when countries differ in their social security systems. Funding and early retirement both foster capital accumulation relative to pay-as-you-go pensions with flexible retirement. When economies integrate, both imply capital outflow possibly resulting in utility losses.     

The trajectory of wealth in retirement

In this paper, we develop a measure of household resources that converts total financial and non-financial assets, plus annuity-like assets (mainly, Social Security and defined-benefit pensions) into an expected annual amount of wealth per person in retirement. We use this measure, which we call “annualized comprehensive wealth,” to investigate spend-down behavior among a panel of older households in the Health and Retirement Study (HRS) from 1998 to 2006. Our analysis indicates that for most retired households, comprehensive wealth balances decline much more slowly than their remaining life expectancies, so that the predominate trend is for real annualized wealth to rise significantly with age over the course of retirement. Comparing the estimated age profiles for annualized wealth with profiles simulated from several different life-cycle models, we find that a model that takes into account uncertain longevity, random medical expenses, and intended bequests lines up best with the broad patterns of rising annualized wealth in the HRS.     

Life expectancy, human capital, social security and growth

We analyze the effects of changes in the mortality rate upon life expectancy, education, retirement age, human capital and growth in the presence of social security. We build a vintage growth, overlapping generations model in which individuals choose the length of education and the age of retirement, and where unfunded social security pensions depend on workers' past contributions. Social security has a positive effect on education, but pension benefits favor reductions in retirement age. The net effect is that starting from a benchmark case, higher life expectancies give rise to lower per capita GDP growth in the presence of social security as the share of the active population is reduced. In addition, higher social security contribution rates reduce the growth rate of per capita GDP.     

Social security and unsecured debt

In this paper, we use a calibrated life-cycle model to explore quantitatively ways of reducing the burden of social security in a world populated by both optimizing and rule-of-thumb consumers. Social security contributions force young households with upward-sloping income profiles to save a sizeable portion of their income for retirement, when their optimal consumption plan would likely have them either saving little or borrowing. We first use household data to document that young households have accumulated social security contributions that are large relative to debt holdings. Then, using a calibrated life-cycle model, we show that both allowing households to use social security wealth to pay off their debt and exempting young households from social security contributions (but in both cases requiring higher contributions later) mitigate many of the inefficiencies of social security from the perspective of life-cycle financial planning. Specifically, in our preferred experiment, which exempts households whose heads are under 30 from making social security contributions, we find that certainty-equivalent consumption increases by 3.4% for optimizing households and by 3.3% for rule-of-thumb households.     

On myopia as rationale for social security

It has been argued that “paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems.” This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go (PAYG) social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for PAYG pensions. Sufficiently strong myopia may justify such pensions only if agents cannot borrow against their future pension, but then they are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.     

THE PRESIDENT'S COMMISSION ON PENSION POLICY HOUSEHOLD SURVEY 1979: NET WEALTH DISTRIBUTIONS BY TYPE AND AGE FOR THE UNITED STATES

A household survey was done for the U.S. President's Commission on Pension Policy (1979-81). This paper reports on the net wealth of families in the United States for the year 1979, the first wave of the survey. The survey was begun in September 1979 and was a two-wave, nationwide random sample of households in the United States. The survey instrument gathered information on income, wealth, labor supply, participation in pension plans, vesting status, entitlement to various benefits, attitudinal views on retirement, social security wealth, and individual demographic characteristics. Details of the survey methodology are reported. A response rate of sixty-two percent was achieved among the 6,384 dwelling units in the first wave. Imputations are made to calculate the wealth embodied in private and public employee-based pensions. Included in this valuation is an adjustment for expected vesting status in the pension plan. Net wealth is examined by type and age of the head of household. The average net wealth of the family is $53,956, and the average value of retirement wealth is $3,281 which comprises about 5 to 6 percent of net wealth. The striking changes in the portfolio of net wealth are depicted over the cross-section of age cohorts. The oldest age cohort, 65 and over, is found to have for retirement wealth the lowest frequency of ownership, the lowest proportion of their portfolio in this form of wealth, and the second to lowest average value.     

Old-age benefits and retirement decisions of rural elderly in Brazil

I estimate the impact of social security benefits on retirement decisions of rural workers by studying changes in the rules governing old-age benefits for rural workers in Brazil. I focus on a reform implemented in 1991, which reduced the minimum eligibility age, increased benefits, and extended the program to non-heads of households. Because those benefits come with no strings attached — they are not means or retirement tested — any behavioral response is a pure income effect. The main finding of the paper is that access to old-age benefits is a strong determinant of retirement of rural workers in Brazil: receiving old-age benefits increases the probability of not working by about thirty-eight percentage points and reduces total hours per week by 22½ h.     

退休年龄、教育年限与社会保障

在本文中,我们用养老金的缴纳费率和养老金替代率代表社会保障制度,采用有限生命预期的连续时间状态代际交叠模型作为基本框架,分析了社会保障制度对消费者接受教育的年限、退休年龄、工作年限的选择、GDP增长率和利率的影响。同时,我们还分析了消费者的预期寿命对个体消费者接受教育的年限、退休年龄、工作年限的选择以及对社会保障制度的影响。     

The future of pensions in Europe

Unfunded state pension schemes are projected to become financially unsustainable. This is usually attributed to demographic trends. Yet trends in unemployment and in female labour force participation are quantitatively as important. Improvements in either or both might be sufficient to rescue existing state schemes, especially if combined with an end to the practice of allowing, even after retirement, the value of a pension to rise with national earnings rather than prices.
Attempts at piecemeal reform are important because nothing in economic theory suggests a switch to the alternative, fully funded pensions is desirable. Not only would such a transition be costly, and therefore politically difficult; it also neglects the fact that it makes sense to diversify the retirement portfolio, holding claims both on labour productivity and on capital assets. One can even view pensions as part of a more sophisticated system of intergenerational transfers through which workers finance their earlier education and subsequent retirement.     

退休年龄、教育年限与社会保障

在本文中，我们用养老金的缴纳费率和养老金替代率代表社会保障制度，采用有限生命预期的连续时间状态代际交叠模型作为基本框架，分析了社会保障制度对消费者接受教育的年限、退休年龄、工作年限的选择、GDP增长率和利率的影响。同时，我们还分析了消费者的预期寿命对个体消费者接受教育的年限、退休年龄、工作年限的选择以及对社会保障制度的影响。     

WILL TAX‐BASED HEALTH INSURANCE REFORMS HELP THE SELF‐EMPLOYED STAY IN BUSINESS?

The self‐employed face a tax‐induced disadvantage relative to wage and salary workers when it comes to the payment of health insurance premiums. This paper uses a panel of individual tax return data to test whether lower health insurance premium costs because of an expanded tax incentive result in longer periods of self‐employment. The results suggest that households claiming the deduction are indeed less likely to exit self‐employment. Equalizing the treatment of health insurance premiums for the self‐employed and wage workers by allowing full deductibility from Self‐Employment Contributions Act (SECA) taxes would result in a 7% decrease in the probability of exit. (JEL H32, I18, L26)     

Uncertain Pension Income and Household Saving

This paper investigates the relationship between household saving and pensions, and estimates both the displacement effect of pensions on private saving and the precautionary saving effect due to uncertainty in pension income. I estimate the savings equation implied by a simple life‐cycle model featuring income uncertainty using survey data for Dutch households, with subjective expectations on pension benefits and uncertainty. Exploiting exogenous variation due to pension fund performance, I find that households save significantly more due to uncertainty in pension income. Not controlling for uncertainty biases the estimated displacement effect of pensions on private savings towards zero.     

The Role of Income Effects in Early Retirement

We provide a long‐term perspective on the individual retirement behavior and on the future of retirement by emphasizing the role of (negative) income effects. We consider a political economic theoretical framework, with actuarially “fair” and “unfair” early retirement schemes, and derive a political equilibrium with positive social security contribution rates and early retirement. A reduction in the wages in youth, consistent with the recent labor market trends since the massive introduction of temporary jobs, induces workers to postpone retirement, and—in the “unfair” system—leads to lower contribution rates. A reduction in the growth rate of the economy has opposite effects on the retirement decisions, leading—in the “unfair” system—to more early retirement. Aging induces a negative income effect, but has also an opposite political effect on social security contributions and retirement decisions. For an actuarially “fair” social security system, we provide conditions for the political effect to dominate; in an “unfair” scheme, numerical simulations confirm a slight predominance of the political effect, as contribution rates increase. These results may shed some light on the future of early retirement in aging societies.     

PORTFOLIO ALLOCATION IN THE FACE OF A MEANS‐TESTED PUBLIC PENSION

We investigate whether households adjust their asset portfolios just prior to retirement in ways that are consistent with maximizing eligibility for a means‐tested public pension. We utilize detailed micro data for a nationally‐representative sample of Australian households to estimate a system of asset equations which are constrained to add up to net worth. Our results provide little evidence that healthy households or couples are responding to the incentives embedded in the means tests determining pension eligibility by reallocating assets. While there are some differences in asset portfolios associated with having an income near the income threshold, being of pensionable age, and being in poor health, these differences are often only marginally significant and are not clearly consistent with the incentives inherent in the Australian age pension eligibility rules. Any behavioral response to the incentives inherent in the age‐pension means test appears to be predominately concentrated among single pensioners who are in poor health.     

Social security and the choice between full-time work,part-time work and retirement

This paper investigates the determinants of retirement decisions in the UK. To deal with the endogeneity bias introduced by the piecemeal linear budget constraint generated by the social security system, it specifies a utility function in income–leisure space and assumes that individuals maximise it over three discrete regimes: full-time work, part-time work, and retirement. Using maximum likelihood techniques, it estimates the utility function and quantifies the influence of pensions, wages and personal characteristics (age, health, status, etc.) on the probability of partial and complete withdrawal from the labour market.     

Age-specific entrepreneurship and PAYG: Public pensions in Germany

We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that replicates the age-earnings profiles of these two household types. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 0.7% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050.     

Delaying retirement in Spain

We study the reform of the Spanish public pension system in a multiperiod, general equilibrium, overlapping generations model economy populated by heterogeneous households. Our households differ in their place of birth, in their age, in their education and, endogenously, in their employment status, in their wealth, and in their pension entitlements. They receive a stochastic endowment of efficiency labor units each period. And they face a disability risk and a survival risk. They understand the link between the payroll taxes that they pay and the public pensions that they receive. And they decide how much to consume and to work, and when to retire from the labor force. We calibrate this economy to Spanish data, and we use it to study the consequences of delaying three years the statutory retirement ages in 2010. We find this reform is sufficient to solve the sustainability problems that plague the current Spanish public pension system. Our model economy predicts that under the current rules, the pension system fund will run out in 2028 and in the reformed economy it will last until 2050. We also find that it is moderately expansionary, and that it improves social welfare from the year 2015 onwards. We conclude that policymakers should seriously consider delaying the statutory retirement ages in Spain sometime in the near future.     

The Effect of Benefit Reductions on the Retirement Age: The Heterogeneous Response of Manual and Non‐Manual Workers

I estimate the effect of benefit reductions on the timing of retirement. The introduction of actuarial adjustments in the German public pension system serves as a source of exogenous variation to estimate discrete time transition rates into retirement for individuals of age 60–66. Responses to benefit reductions are elaborated separately for manual and non‐manual workers. On average, individuals postpone retirement by 13.2 months if pension benefits are reduced by 3.6 percent for each year of early retirement. This result is in line with the previous quasi‐experimental literature and suggests that people respond to the incentive of reducing the implicit tax on further periods of work. However, among men the response is about 50 percent lower for manual workers compared to non‐manual workers. Surprisingly, this does not necessarily indicate that retirement incomes of manual workers deteriorate. The explanation is that disability pensions are available at age 63—without benefit reductions.     

合肥市、芜湖市农民工社会保障调查及其解决思路分析

在调查的基础上阐述了安徽省合肥市与芜湖市的农民工社会保障现状,指出农民工内部差异较大,对社会保障需求客观上存在较大差异。在分析两城市农民工社会保障问题的基础上,本文提出分步实施、分类保障,逐步将农民工与城镇居民纳入同一社会保障体系的思路。"分类保障"指出部分农民工现在可以纳入到现有的城镇社会保障体系当中;另部分农民工不应该办理养老保险但应有大病与工伤保险,部分农民工暂时可以不要任何保障。"分步实施"指出中央政府首先实施分类保障,在此基础上建立全国统一的、低缴费率的社会统筹,并最终将全部农民工纳入到现有的社会保障体系当中。