Propagation and smoothing of shocks in alternative social security systems

Alan Auerbach, Lorenz Kueng, Ronald Lee and Yury Yatsynovich

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

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.

Keywords: Good Health and Well Being; Notional defined contribution systems; Pay-as-you-go systems; Generational incidence; Economic Theory; Applied Economics; Econometrics; Economics (search for similar items in EconPapers)
Date: 2018-08-01
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Propagation and smoothing of shocks in alternative social security systems (2018)
Working Paper: Propagation and Smoothing of Shocks in Alternative Social Security Systems (2013)
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