Propagation and Smoothing of Shocks in Alternative Social Security Systems / Alan Auerbach, Lorenz Kueng, Ronald Lee.

Format:

Book

Author/Creator:

Auerbach, Alan.

Contributor:

National Bureau of Economic Research.

Kueng, Lorenz.

Lee, Ronald.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19137.

NBER working paper series no. w19137

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations, so a potential role for public old-age pension systems is to spread economic and demographic shocks among different generations. This paper evaluates the smoothing and propagation of shocks of three pay-as-you-go public pension schemes, based on the actual U.S. and German systems, which vary in the extent to which they rely on tax adjustments versus benefit adjustments to provide annual cash-flow budget balance. Modifying the Auerbach-Kotlikoff (1987) dynamic general-equilibrium overlapping generations model to incorporate realistic patterns of fertility and mortality and shocks to productivity, fertility and mortality, we evaluate the effectiveness of the three public pension systems at spreading the effects of such shocks. We find that the systems, particularly those that rely to some extent on tax adjustments, are effective at spreading fertility and mortality shocks, but that this is not the case for productivity shocks, for which the pension systems actually tend to concentrate the economic impact. These results suggest that both system design and the source of shocks are important factors in determining the potential of public pension arrangements to spread the burden of shocks.

Notes:

Print version record

June 2013.