_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 3, No. 12: June 20, 2002
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
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Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2002. All rights reserved.
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Topic of This Issue:
Social Security in the Long Run
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T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"The Social Security Surplus, the Trust Fund, and the Federal
Budget"
Tax Notes, Vol. 94, No. 7, February 18, 2002
ALAN D. VIARD
Federal Reserve Bank of Dallas
Research Department
"Social Insecurity? The Effects of Equity Investments on Social
Security Finances"
National Tax Journal, Vol. 54, No. 3, pp. 645-68, September
2001
AMY REHDER HARRIS
Congressional Budget Office
NOAH MEYERSON
Congressional Budget Office
JOEL SMITH
Congressional Budget Office
"Social Security: Unemployment and Immigration"
EBRI Notes, Vol. 23, No. 4, April 2002
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
"Demographic Shock and Social Security: A Political Economy
Perspective"
International Tax and Public Finance, Vol. 8, No. 4, pp.
417-431, August 2001
GEORGES CASAMATTA
Universite de Toulouse
GREMAQ
University of Liege
HELMUTH CREMER
Universite de Toulouse
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
PIERRE PESTIEAU
Catholic University of Louvain (UCL)
Center for Operations Research and Economics (CORE)
Centre for Economic Policy Research (CEPR)
University of Liege
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
WORKING PAPERS
"The Political Economy of Structural Pension Reform"
ESTELLE JAMES
Consultant, Washington DC
World Bank
SARAH BROOKS
Ohio State University
"Junior Must Pay: Pricing the Implicit Put in Privatizing Social
Security"
GEORGE M. CONSTANTINIDES
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
JOHN B. DONALDSON
Columbia Business School
RAJNISH MEHRA
University of California at Santa Barbara
National Bureau of Economic Research (NBER)
"Social Security and Democracy"
CASEY B. MULLIGAN
University of Chicago
National Bureau of Economic Research (NBER)
RICARD GIL
University of Chicago
Department of Economics
XAVIER SALA-I-MARTIN
Columbia University
Department of Economics
Universitat Pompeu Fabra
National Bureau of Economic Research (NBER)
S S R N I N F O R M A T I O N
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Social Security Surplus, the Trust Fund, and the Federal
Budget"
Tax Notes, Vol. 94, No. 7, February 18, 2002
BY: ALAN D. VIARD
Federal Reserve Bank of Dallas
Research Department
Contact: ALAN D. VIARD
Email: Mailto:Alan.Viard@dal.frb.org
Postal: Federal Reserve Bank of Dallas
Research Department
PO Box 655906
Dallas, TX 75265-5906 UNITED STATES
Phone: 214-922-5172
Fax: 214-922-5194
ABSTRACT:
This report clarifies the economic effects of the social
security surplus and the trust fund and addresses misconceptions
that have appeared in the public debate. The social security
surplus reduces the overall government's debt to the public,
thereby providing a fiscal gain to future taxpayers and spending
recipients.
This effect is diminished to the extent that the social
security surplus triggers an offsetting response in the
remainder of the budget. The trust fund is an accounting device;
it neither amplifies nor negates the fiscal gain provided by the
surplus, but merely allocates it within the government. Despite
the fiscal gain provided by the surplus, future generations
continue to face a severe fiscal burden under the current-law
baseline. A larger social security surplus would alleviate this
problem by providing a larger fiscal gain.
______________________________
"Social Insecurity? The Effects of Equity Investments on Social
Security Finances"
National Tax Journal, Vol. 54, No. 3, pp. 645-68, September
2001
BY: AMY REHDER HARRIS
Congressional Budget Office
NOAH MEYERSON
Congressional Budget Office
JOEL SMITH
Congressional Budget Office
Contact: NOAH MEYERSON
Email: Mailto:noahm@cbo.gov
Postal: Congressional Budget Office
Long-Term Modeling Group
Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515 UNITED STATES
Phone: 202-226-2600
Co-Auth: AMY REHDER HARRIS
Email: not available
Postal: Congressional Budget Office
Long-Term Modeling Group
Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515 UNITED STATES
Co-Auth: JOEL SMITH
Email: Mailto:joels@cbo.gov
Postal: Congressional Budget Office
Long-Term Modeling Group
Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515 UNITED STATES
ABSTRACT:
In 2000, the Social Security system experienced an annual net
inflow of over $150 billion, raising its balance to over one
trillion dollars. Once the baby boom generation begins to
retire, however, the annual surpluses will almost certainly turn
into deficits, and the trust funds are predicted to be exhausted
in 2038. Investing part of the trust funds in equities would
increase the expected returns and thus improve the system's
expected long-term finances. But with higher expected returns
comes higher risk: Equity investment could potentially leave the
system worse off. This paper uses the Long-Term Actuarial Model
developed by the Congressional Budge Office to analyze both the
higher expected returns and the additional uncertainty that
accompany equity investment, while recognizing that uncertainty
already exists in the system due to unpredictable demographic
and economic factors. We find that there is a clear risk-return
tradeoff in the short term, but that (given a consistent policy
of equity investment) the magnitude of risk falls substantially
over a 75-year horizon.
______________________________
"Social Security: Unemployment and Immigration"
EBRI Notes, Vol. 23, No. 4, April 2002
BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=311382
Contact: CRAIG COPELAND
Email: Mailto:copeland@ebri.org
Postal: Employee Benefit Research Institute (EBRI)
Suite 600
2121 K Street, NW
Washington, DC 20037-1896 UNITED STATES
Phone: 202-775-6356
Fax: 202-775-6312
Note: The PDF for the above title also contains the full-text
of another April 2002 EBRI Notes article abstracted on
SSRN: "Retirement Annuity and Employment-Based Pension
Income."
Paper Requests:
Contact Alicia Willis at Mailto:publications@ebri.org, or 2121 K
St., NW, Suite 600, Washington, DC 20037-1896.
Phone:(202)572-7422, Fax:(202)775-6312. Full-Text downloads are
available from SSRN Online for $7.50.
ABSTRACT:
This article investigates the impact of increases and decreases
in the level of net immigration in the United States as well as
the effect of changes in the unemployment rate on the financial
status of the Social Security program. After presenting the
historical values of these important factors, the article
describes the SSASIM policy simulation model results concerning
the actuarial balance of the Social Security program assuming
different values for the unemployment rate and the level of net
immigration. The study found that a half a percentage point
change in the unemployment rate leads to a 0.06 percentage point
to 0.07 percentage point change in the Social Security program's
actuarial balance. Furthermore, should net immigration fall by
one-half from the Board of Trustees' intermediate assumption
value, the actuarial balance would decrease by -0.28 percentage
points, or about 15 percent of the Board of Trustees' 2001
report's value.
Keywords: Immigration, Social Security financing, Social
Security modeling, Unemployment
JEL Classification: H55, J6
______________________________
"Demographic Shock and Social Security: A Political Economy
Perspective"
International Tax and Public Finance, Vol. 8, No. 4, pp.
417-431, August 2001
BY: GEORGES CASAMATTA
Universite de Toulouse
GREMAQ
University of Liege
HELMUTH CREMER
Universite de Toulouse
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
PIERRE PESTIEAU
Catholic University of Louvain (UCL)
Center for Operations Research and Economics (CORE)
Centre for Economic Policy Research (CEPR)
University of Liege
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
Contact: GEORGES CASAMATTA
Email: Mailto:georges.casamatta@univ-tlse1.fr
Postal: Universite de Toulouse
GREMAQ
Manufacture des Tabacs
21 Allees de Brienne
31000 Toulouse, FRANCE
Co-Auth: HELMUTH CREMER
Email: Mailto:helmut@cict.fr
Postal: Universite de Toulouse
Place Anatole France
F-31042 Toulouse Cedex, FRANCE
Co-Auth: PIERRE PESTIEAU
Email: Mailto:p.pestieau@ulg.ac.be
Postal: Catholic University of Louvain (UCL)
Center for Operations Research and Economics
(CORE)
34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, BELGIUM
ABSTRACT:
We assume that individual voters differ not only according to
age but also productivity. In the steady state, workers with
wages in the intermediate range join the retired persons to form
a majority and vote for a positive level of social security.
When a shock decreases population growth, entrenched interests
can constrain majority voting decisions and prevent reforms in
the name of entitlements. We show that from a Rawlsian viewpoint
it may be desirable to rely on these entitlements to protect the
low wage earners of the transition generations. However, when
the possibility of fixing a basic pension is introduced, it
constitutes a better instrument than entitlements.
Keywords: Social security, majority voting, entitlements,
aging
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"The Political Economy of Structural Pension Reform"
BY: ESTELLE JAMES
Consultant, Washington DC
World Bank
SARAH BROOKS
Ohio State University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=287393
Contact: ESTELLE JAMES
Email: Mailto:ejames@estellejames.com
Postal: Consultant, Washington DC
Washington, DC 20007 UNITED STATES
Co-Auth: SARAH BROOKS
Email: not available
Postal: Ohio State University
2100 Neil Avenue
Columbus, OH 43210 UNITED STATES
ABSTRACT:
This paper examines the political economy of structural social
security reform - the shift from a publicly managed,
pay-as-you-go, defined benefit system to one that includes a
defined contribution, funded, privately managed pillar. We
analyze the connection between the pre-existing conditions in a
country and the reforms that are likely to succeed and describe
some of the strategies that policy-makers have used to overcome
opposition to reform. The paper addresses three central
questions. How have political and economic forces influenced the
probability of structural reform? How have these factors
influenced the nature of reform, especially its public-private
mix? How have reforming countries overcome resistance from
powerful interest groups? We answer the first two questions
through quantitative analysis and the third question through
qualitative case studies of a smaller number of reforming
countries in Latin America and the transition economies. We
provide examples of the many trade-offs and forms of
compensation that governments have used to build a coalition in
favor of reform when political power is dispersed. Results of
the analysis show that a large implicit pension debt (the
present value of the pension obligations of the government to
contributors under the old pay-as-you-go system) helps put
pension reform on the political agenda but then constrains the
degree of funding and privatization that can be achieved - this
offers evidence of path dependency. The existence of private
financial organizations such as funded voluntary pension plans
signals institutional interests that speed the adoption of a
mandatory funded pillar. Factors such as cultural, linguistic
and geographic proximity to "first movers" play a key role in
explaining how reform ideas diffuse across countries.
______________________________
"Junior Must Pay: Pricing the Implicit Put in Privatizing Social
Security"
BY: GEORGE M. CONSTANTINIDES
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
JOHN B. DONALDSON
Columbia Business School
RAJNISH MEHRA
University of California at Santa Barbara
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=307876
Paper ID: NBER Working Paper No. W8906
Date: April 2002
Contact: GEORGE M. CONSTANTINIDES
Email: Mailto:gmc@gsb.uchicago.edu
Postal: University of Chicago
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637 UNITED STATES
Phone: 773-702-7258
Fax: 773-752-0458
Co-Auth: JOHN B. DONALDSON
Email: Mailto:jd34@columbia.edu
Postal: Columbia Business School
3022 Broadway
New York, NY 10027 UNITED STATES
Co-Auth: RAJNISH MEHRA
Email: Mailto:mehra@econ.ucsb.edu
Postal: University of California at Santa Barbara
Santa Barbara, CA 93106 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
Proposals that portion of the Social Security Trust Fund assets
be invested in equities entail the possibility that a severe
decline in equity prices renders the Fund assets insufficient to
provide the currently mandated level of benefits. In this event,
existing taxpayers may be compelled to act as insurers of last
resort. The cost to taxpayers of such an implicit commitment
equals the value of a put option with payoff equal to the
benefit's shortfall. We calibrate an OLG model that generates
realistic equity premia and value the put. With 20 percent of
the Fund assets invested in equities, the highest level
currently under serious discussion, we value a put that
guarantees the currently mandated level of benefits at one
percent of GDP, or a temporary increase in Social Security
taxation of at most 25 percent. We value a put that guarantees
90 percent of benefits at merely .03 percent of GDP. In contrast
to earlier literature, our results account for the significant
changes in the distribution of security returns resulting from
Trust Fund purchases. We also explore the inter-generational
welfare implications of the guarantee.
JEL Classification: D91, E2, E60, G11, G13, H55
______________________________
"Social Security and Democracy"
BY: CASEY B. MULLIGAN
University of Chicago
National Bureau of Economic Research (NBER)
RICARD GIL
University of Chicago
Department of Economics
XAVIER SALA-I-MARTIN
Columbia University
Department of Economics
Universitat Pompeu Fabra
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=313659
Paper ID: NBER Working Paper No. W8958
Date: May 2002
Contact: CASEY B. MULLIGAN
Email: Mailto:c-mulligan@uchicago.edu
Postal: University of Chicago
1126 East 59th Street
Chicago, IL 60637 UNITED STATES
Phone: 773-702-9017
Fax: 773-702-8490
Co-Auth: RICARD GIL
Email: not available
Postal: University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL 60637 UNITED STATES
Co-Auth: XAVIER SALA-I-MARTIN
Email: Mailto:xs23@columbia.edu
Postal: Columbia University
Department of Economics
420 W. 118th Street
New York, NY 10027 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
Many political economic theories use and emphasize the process
of voting in their explanation of the growth of Social Security,
government spending, and other public policies. But is there an
empirical connection between democracy and Social Security
program size or design? Using some new international data sets
to produce both country-panel econometric estimates as well as
case studies of South American and southern European countries,
we find that Social Security policy varies according to economic
and demographic factors, but that very different political
histories can result in the same Social Security policy. We find
little partial effect of democracy on the size of Social
Security budgets, on how those budgets are allocated, or how
economic and demographic factors affect Social Security. If
there is any observed difference, democracies spend a little
less of their GDP on Social Security, grow their budgets a bit
more slowly, and cap their payroll tax more often, than do
economically and demographically similar nondemocracies.
Democracies and nondemocracies are equally likely to have
benefit formulas inducing retirement and, conditional on GDP per
capita, equally likely to induce retirement with a retirement
test vs. an earnings test.