creator: Burtless, Gary
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Investment, and the Level and Distribution of Worker Well-Being
description- – All observers agree that Social Security reform is needed to restore the program's solvency. This paper examines the impact of alternative reforms on Social Security finances, on the wider U.S. economy, and on workers who contribute to and receive benefits from the program. In one reform we consider, Social Security benefits are eventually reduced about one-third so that benefits can be financed with the present 12.4 percent payroll tax rate. Workers are required to contribute an additional 2 percent of their wages to a new defined-contribution pension. We embed Social Security's finances in a neoclassical growth model and show how additions to Social Security and defined-contribution pension reserves, if they are saved, can increase the future growth of productivity and wages and reduce the rate of return on capital. These economy-wide impacts in turn affect the lifetime wages and pensions of workers born in successive generations. They have differing effects on workers depending on workers' relative earnings and the trend in their earnings over their careers. Our model includes a microsimulation component to measure these effects on individual workers. Our findings suggest that scaling back traditional Social Security and replacing part or all of it with defined-contribution pensions can potentially increase national saving over a very lengthy horizon, thus lifting the domestic capital stock and wages. The potential benefits are larger for high-wage workers than for average- and low-wage workers. Because of the potential impact of this reform on the U.S. capital-labor ratio, real capital returns might be adversely affected by this reform, reducing the rate of return workers will obtain in their defined-contribution pension accounts. Our results also imply that generations which will retire before about 2035 would enjoy higher lifetime pensions and net incomes under a policy that maintains Social Security benefits with tax hikes. That is, generations that will retire over the next 30 or 40 years would be better off under a policy that preserves Social Security through tax hikes than under a policy that scales back benefits and partially replaces them with benefits from a new defined-contribution system.
- – 2000-01-01
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Retirement Trends and Policies to Encourage Work Among Older Americans
description- – The trend toward earlier and earlier retirement was one of the most important labor market developments of the twentieth century. It was evident in all the major industrialized countries. In the United States, however, the trend toward earlier retirement came to at least a temporary halt in the mid-1980s. Male participation rates at older ages have stabilized or even increased slightly. Older womenês participation rates are clearly rising. This paper examines the environmental and policy changes contributing to the long-term decline in the U.S. retirement age as well as developments that contributed to the recent reversal. The dominant source of earlier retirement was the long-term increase in Americans' wealth, which permitted workers to enjoy rising living standards even as they spent a growing percentage of their lives outside the paid work force. The expansion of Social Security pensions and of employer-sponsored pension plans and the introduction of mandatory retirement rules also encouraged earlier retirement over much of the last century. Many public policies and private institutions that encouraged early retirement have been modified in recent years. Mandatory retirement has been outlawed in most jobs. Social Security is no longer growing more generous, and worker coverage under company pension plans is no longer rising. Both Social Security and many private pensions have become more"age neutral"with respect to retirement. Public and private pension programs now provide weaker financial incentives for workers to retire at particular ages, such as age 62 or age 65, and offer stronger incentives for aging workers to remain in the labor force. The paper outlines additional policies that could encourage later retirement. An open question is whether such policies are needed. Rising labor productivity and increased work effort during the pre-retirement years mean that Americans can continue to enjoy higher living standards, even as improved longevity adds to the number of years that workers spend in retirement. If opinion polls are to be believed, most workers favor preserving the institutions that allow early retirement even if it means these institutions will require heavier contributions from active workers.
- – WP436
- – 2000-01-01
- – application/pdf
Lifetime Earnings Patterns, the Distribution of Future Social Security Benefits, and the Impact of Pension Reform
description- – This paper describes an analysis of career earnings patterns developed for predicting the impact of Social Security reform. We produce estimates of age-earnings profiles of American men and women born between 1931 and 1960. The estimates are obtained using lifetime earnings records maintained by the Social Security Administration. We use a standard econometric approach to develop forecasts of future individual earnings, and we supplement these estimates by developing estimates of the shape and prevalence of nine stylized earnings patterns of U.S. workers. These two alternative approaches to estimating career earnings patterns have significant advantages over the traditional analytical approach of examining a small number of representative workers who are assumed to have steady earnings throughout their careers. Few workers have level career earnings, so the traditional approach to policy simulation represents a serious distortion of actual labor market experience. Moreover, differences in the pattern of career earnings can produce wide disparities in pension entitlements, even for workers with the same average earnings, under individual account and other retirement plans. Since defined-contribution pension plans are frequently proposed as a supplement or replacement for traditional Social Security, it is important that policy simulation be based on accurate representations of career earnings patterns.
- – 1999-12-01
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The Trend in Lifetime Earnings Inequality and Its Impact on the Distribution of Retirement Income
description- – This paper examines the trend in career earnings profiles and lifetime earnings inequality using a new data set that links micro-census information from a Census Bureau survey (the Survey of Income and Program Participation, or SIPP) with the summary earnings records (SER) maintained by the Social Security Administration. It then considers the implications of these trends for the trend of Social Security replacement rates and future changes in the inequality of pension income. The data set covers men and women born in successive years between 1926 and 1965 using a combination of observed and predicted earnings. Our analysis finds that aggregate male wage and employment patterns have remained much more stable than is the case for women. Although less educated men in recent birth cohorts have fared worse than men in earlier cohorts who had the same schooling, the increase in average educational attainment has largely offset the employment and relative wage losses suffered by less educated men. Among women, while female employment rates and average earnings remain lower than those of men of the same age, the male-female gap is now much smaller than it was in earlier cohorts. The age pattern of employment and earnings among women is growing more similar to the pattern observed among men. Our tabulations of historical earnings and forecast of future earnings patterns suggest that that lifetime earnings inequality will increase significantly among men. Compared with men born between 1936-1940, we predict that men born in 1961-1965 will experience 12 percent greater inequality in career earnings. Even though women's inequality has increased if we measure inequality among full-time, year-round workers who are employed during a particular year, inequality has fallen sharply if we widen the sample to include all women who are potentially available to work. The rising employment rate of women has increased the percentage of working-age years that women spend in jobs. It has dramatically reduced the fraction of women who earn extremely low lifetime wages because they are employed in only a few years of their potential careers. The noticeable increase in lifetime earnings inequality among men has thus been offset, at least in part, by a sizable reduction in career earnings inequality among women.
- – 2001-08-01
- – application/pdf
Is Working Longer the Answer for an Aging Workforce?
description- – One of the most important labor market developments of the last century was the sustained trend toward earlier retirement among American men. This trend came to at least a temporary halt in the mid-1980s. Since then, male participation rates at older ages have stabilized or even increased slightly, while older women's participation rates have begun rising dramatically. The dominant factor driving the trend toward earlier male retirement was a long-term increase in economic wealth, which permitted workers to enjoy rising living standards even as they spent a growing percentage of their lives outside the workforce. The expansion of Social Security and of employer-sponsored pension plans, and the introduction of mandatory retirement rules, also encouraged earlier retirement over much of the last century. In recent years, many public policies and private institutions that encourage early retirement have been modified. Mandatory retirement was outlawed in most jobs. Social Security is no longer growing more generous, and coverage under company pension plans is no longer rising. In addition, both Social Security and private pensions have become more"age neutral,"meaning that they provide either weaker incentives or no incentives to retire at particular ages, such as age 62 or age 65. Finally, the scheduled rise in Social Security's normal retirement age over the next two decades will encourage later retirements, at least modestly. An open question is whether further changes are needed. Given that labor force growth is slowing and Americans are enjoying longer and healthier lives, efforts to encourage people to work longer could have important benefits both for individuals and for the national economy. On the other hand, rising labor productivity, increased work effort, and more saving during the pre-retirement years could allow Americans to enjoy higher living standards even if they choose to spend more years in retirement. If opinion polls are to be believed, most workers favor preserving options for early retirement, even if it means heavier contributions to the retirement system during their working careers.
- – WP550
- – 2002-12-17
- – application/pdf
Pension Reform in the Presence of Financial Market Risk
description- – As their populations grow older, the industrial countries face steep increases in public pension costs. If countries change their pension systems in advance of sharply higher pension costs, it is possible to prepare for the added retirement costs by funding a portion of the future liabilities through increased saving. By boosting capital formation and economic growth, higher saving has the potential to increase the incomes - and the welfare - of future workers and retirees.This paper considers investment accumulation and pension adequacy in light of financial market risk. We examine two alternative reforms of the U.S. pension system that are aimed at pre-funding part of future pension liabilities and increasing national saving. The first policy expands the role of advance funding in the existing Social Security system by moving toward a policy of tax increases that are large enough to maintain close actuarial balance over a 75-year horizon. Under the alternative policy, the traditional Social Security program adopts pay-as-you-go financing after 2033 and a new system of individual investment accounts is adopted to supplement (reduced) pensions under the traditional system. Advance funding takes place in the new individual investment account system.The findings reported in this paper show the implications of investing part of the pension fund accumulation in assets which are subject to significant financial market risk. A major conclusion is that the magnitude of financial risk is empirically quite large. Surprisingly, some of the risks connected with advance funding can be even greater when assets are accumulated within the traditional Social Security program rather than individual investment accounts. Although advance funding in Social Security holds out the promise of raising national saving and future output even more than fund accumulation in individual accounts, the variability of returns on Trust Fund investments can have more far-reaching effects on the aggregate economy, through its potential impact on national savings, returns on capital, and the average wages. For example, a sequence of unexpectedly high investment returns on Trust Fund reserves might induce policymakers to reduce the Social Security contribution rate, lessening the flow of net savings from Trust Fund accumulation. The reduced rate of saving would in turn slow the growth of the capital stock, possibly increasing the real return on capital and reducing still further the required contribution rate for Social Security.
- – 2002-07-01
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Implications of the Bush Commission Reforms for Married Couples
description- – In December 2001 the President's Commission to Strengthen Social Security published a report describing plans to reform Social Security through the introduction of new, privately managed, defined-contribution pension accounts. The new accounts are to be financed by diverting a portion of payroll taxes that are now used to finance pensions under the existing defined-benefit public pension system. This paper evaluates the overall impact of the Commission's second plan on the distribution of retirement income and rates of return on pension contributions within and among future generations of married couples.
- – 2003-02-01
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Supply-Side Consequences of Social Security Reform: Impacts on Saving and Employment
description- – Pension reform can potentially increase saving and improve incentives for labor force participation later in life. We investigate whether these effects are likely to occur and the potential size of the effects on private and total saving and on employment past age 55. Our survey of existing evidence and new empirical analysis focus on three issues: The possible reduction in other government saving if more assets are accumulated in a public retirement program; the reduction in non-pension private saving if assets are accumulated in new private retirement accounts; and the increase in old-age labor supply that could occur if Social Security benefits are reduced.We find mixed evidence that faster accumulation of assets in public or private retirement funds would produce higher public and private saving. Using the most optimistic estimates of the public saving response to faster accumulation in public retirement funds, we find advance funding will cause a big increase in aggregate saving and future national income. However, international evidence suggests governments are likely to offset a large percentage of public pension fund accumulation by reducing saving in other government accounts. The evidence on private saving suggests that savers tend to offset faster accumulation of assets in pension accounts with lower saving in non-pension accounts. Most empirical estimates of the labor supply response to Social Security reductions imply the response will be small. Even using unrealistically high estimates of responsiveness, we find that a one-third cut in benefits will add less than 3 percent to the future labor force.
- – 2004-01-01
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The Impact Of Aging On Financial Markets
description- – All major industrial countries will experience significant population aging over the next several decades. In both academic circles and the business press it is widely believed that population aging will have important effects on financial markets because of its expected impact on saving rates and the demand for investment funds. This paper reviews the literature on the macroeconomic and asset market effects of population aging, focusing on four related issues: (a) The impact of population age structure on aggregate household saving; (b) The effect of population aging on investment demand; (c) Evidence on the influence of population age structure on financial market asset prices and returns; and (d) Effects of globalization on our interpretation of the impact of demographic change.
- – WP2004-23
- – 2004-10-01
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The Age Profile of Income and the Burden of Unfunded Transfers in Four Countries: Evidence from the Luxembourg Income Study
description- – This paper uses micro-census income data from the Luxembourg Income Study (LIS) to measure the current and future burden of financing public transfers, especially benefits supporting the aged and near-aged. The analysis distinguishes between income obtained from households' own saving and labor earnings, on the one hand, and the part financed with unfunded transfers, on the other. The burden of unfunded transfers is defined as the tax on factor income that is needed to pay for such transfers under a balanced budget rule. The paper develops a framework for estimating and forecasting this burden using micro-census reports on the current age distribution of factor incomes, the age distribution of transfer incomes, and U.S. Census Bureau projections of the future age structure of the population. Because survey data are inaccurate and incomplete, the micro-census income reports are adjusted to reflect under-reporting based on estimates of aggregate income from the national income and product accounts. Empirical estimates of current and future tax burdens are derived for four OECD countries. These show that the burden of German and U.S. transfers is unusually sensitive to the effects of an aging population. In contrast, the burden of public transfers in Finland and Britain is less sensitive to the effects of an older population because transfers in those countries are less heavily tilted toward aged beneficiaries. Factor incomes received by aged Americans are high by international standards, providing a partial offset to the sharp tilt of U.S. transfers in favor of the elderly. As the U.S. population grows older, factor incomes will decline more gradually than is the case in other rich countries, helping to maintain the size of its tax base.
- – 2005-01-01
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International Investment for Retirement Savers:Historical Evidence on Risk and Returns
description- – An important decision facing retirement savers is how to allocate their savings across different assets. The decision includes the choice of how to divide investments between domestic and foreign holdings. This study uses return data for 1927-2005 to determine whether cross-border investing in the past would have been advantageous to retirement savers in eight large industrialized countries. By assumption investors can buy mutual fund shares in index funds for stocks and bonds in their home country and in any of seven foreign countries. The mutual funds' foreign holdings are not hedged to protect investors against currency fluctuations. The paper's goal is to determine whether workers in the eight countries would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds. Consistent with past theoretical and empirical findings, the results show that workers could have improved expected financial performance by investing in foreign as well as domestic equities. Remarkably, retirement savers in nearly all countries would have obtained higher average pensions with a 100% foreign allocation than with a 100% domestic allocation, even if they followed extremely naïve strategies in allocating equity investments across different foreign markets. For retirement savers in most countries, though not the United States, naïve overseas investment strategies would also have reduced the risk of catastrophically poor investment performance. In all countries, retirement savers who selected a global portfolio allocation along the efficient frontier could obtain better average pensions with lower risk of very small pensions than savers who restrict their investments to the domestic stock and bond funds.
- – 2007-02-01
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Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence
description- – A crucial decision facing retirement savers is how to allocate their savings across broad investment classes, including the choice of how to divide investments between domestic and foreign holdings. This study investigates whether cross-border investing would have been advantageous to U.S. retirement savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized countries that have reliable historical time series data on stock and government bond returns. The goal is to determine whether U.S. workers would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds without hedging the currency risks of their overseas investments. The results show that workers could indeed have increased their expected pensions if they included unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient frontier. Under many naïve investing strategies, however, increasing workers' allocation to overseas assets will not reduce the risk of catastrophically poor investment performance. The tabulations show that the risk of obtaining a very low pension replacement rate actually increases if workers allocate a sizeable percentage of their savings to overseas investments.
- – 2006-12-01
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