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Econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Smetters, Kent Article Prospects for social security reform in the United States NBER Reporter Online Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: Smetters, Kent (2005) : Prospects for social security reform in the United States, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. Summer 2005, pp. 11-14 This Version is available at: http://hdl.handle.net/10419/61875 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu NBER Working Paper No. 9479, responses in C.M. Reinhart and V.R. (January 1999), pp. 27-54. February 2003, forthcoming in C.M. Reinhart, “Some Lessons for Policy 11 A survey of the literature on capital Reinhart, C. A. Végh and A. Velasco, Makers Who Deal with the Mixed controls is provided in N. Magud and eds. Capital Flows, Crisis, and Blessing of Capital Inflows,” in M. C.M. Reinhart, “Capital Controls: An Stabilization: Essays in Honor of Guillermo Kahler, ed., Capital Flows and Financial Evaluation” in S. Edwards, ed., A. Calvo. Crises, Council on Foreign Relations International Capital Flows, forthcoming 8 For a fuller discussion, see G.L. Book, Ithaca, NY: Cornell University from the University of Chicago Press. Kaminksy and C.M. Reinhart, “The Press, 1998, pp. 93-127. 12 C.M. Reinhart and R.T. Smith, Twin Crises: The Causes of Banking 10 This is discussed in C.M. Reinhart “Temporary Controls on Capital and Balance-of-Payment Problems,” and V.R. Reinhart, “On the Use of Inflows,” NBER Working Paper No. American Economic Review, 89 (3), (June Reserve Requirements in Dealing with 8422, August 2001, and Journal of 1999), pp. 473-500. the Capital-Flow Problem,” International International Economics, 57 (2), August 9 I have documented the typical policy Journal of Finance and Economics, 4 (1), 2002, pp. 327-51. Prospects for Social Security Reform in the United States Kent Smetters* One of the most far-reaching typically already fairly portable across of idiosyncratic risks, traditional shifts in fiscal policy around the world employers. With a few exceptions, the defined-benefit systems more easily during the past two decades has been public pension benefit formula in most allow for sharing wage and longevity the fundamental restructuring of pub- countries is dependent on the wages of uncertainty.2 Relatively larger transac- lic pension systems. Over two dozen the worker regardless of the actual tion costs in defined contribution countries across five continents have employer. plans, as well as problems associated converted at least part of their pay-as- In fact, the public plan conver- with financial literacy, moral hazard, you-go, defined-benefit, public pen- sions seem fairly puzzling at first. To and adverse selection, only seem to sion systems into systems based on be sure, many common arguments buttress the case for the traditional funded, defined-contribution accounts. have been put forth in favor of “per- design. So why are more and more Several additional countries are cur- sonal accounts” including the potential countries abandoning the traditional rently in the process of conversion, to earn higher rates of return in equi- design for the funded, defined contri- and even more countries, including the ties, increased national savings, as well bution model that, in theory, is no bet- United States, are debating it. as greater bequeath-ability. However, ter than the traditional design and The shift toward defined-contri- even if we believed that a portion of potentially even worse? bution plans in the private sector has the equity premium were a “freebie” Adding to the puzzle is that these increased the mobility of workers, and not just a compensation for risk, reforms have taken on numerous because traditional defined-benefit higher returns could be earned by a shapes and sizes across the world. plans have a “lock-in effect” that dis- public pension system by investing in While, politically, the adoption of per- courages employees from switching equities, which has the added benefit sonal accounts are often linked to employers. Therefore, the conversion of potentially improving risk sharing demographic concerns (for example, of public pension plans to the defined- across generations.1 National saving retirement of baby boomers in the contribution model sometimes has also could be increased by pre-funding United States), the actual evidence been lumped together as part of this the traditional pension system. The does not seem to support this motive same “modernization” movement. traditional pension scheme also could for personal accounts. Indeed, the However, that explanation is problem- be complemented with a life insurance largest reforms occurred in less devel- atic, because public pension plans are payment upon death that replicated oped countries where future demo- the bequeath-ability aspect of personal graphic problems are projected to be * Smetters is a Research Associate in the accounts. the least severe, including Chile (1981), NBER’s Program on Public Economics and Indeed, in a deterministic setting, Columbia (1993), Peru (1993), Mexico an associate professor at The Wharton School the traditional public defined benefit (1997), Bolivia (1997), El Salvador at the University of Pennsylvania. His pro- pension systems in theory could (1998), and Kazakhstan (1998). In each file appears later in this issue. achieve the same economic objectives of these countries, the vast majority of as personal accounts. In the presence the final expected retirement benefit is NBER Reporter Summer 2005 11 derived from income produced by of reform but simply a necessary by about 1.5 percent of wages. assets held in the new defined-contri- byproduct of securing a safer retire- These calculations, however, bution accounts. In contrast, more ment income independent of the sub- unrealistically and optimistically modest reforms occurred in countries stantial level of trust required by a pay- assume that people continue to work with higher per-capita incomes where as-you-go financed scheme. Personal and earn just as much as before the demographic problems are more retirement accounts in these countries change in fiscal policy. New empirical severe, including Switzerland (1985), probably would have been created evidence by Prescott (2004), though, the United Kingdom (1986), Denmark even without demographic concerns. suggests otherwise: he attributes the (1990), Australia (1992), Argentina In contrast, in developed coun- sizable difference in the average num- (1994), China (1995), Uruguay (1996), tries, where reforms have been smaller, ber of working hours per worker in the Hungary (1998), Sweden (1998), and previous downward benefit adjust- United States versus many European Poland (1999). These countries have ments and inequities, while existing, countries to the differences in tax adopted systems that blend defined have been less important. Instead, the rates, largely used to finance state- contribution accounts with a defined primary objective in these countries is based retirement benefits.5 Even using benefit. Some countries with the most to pre-fund future benefits since many a much smaller labor supply elasticity serious demographic problems, includ- of these countries face more severe than implied by his study, raising pay- ing Germany and Japan, have passed demographic problems. Partial pre- roll taxes could substantially reduce only minor reforms. So, why are the funding of future benefits avoids more household savings and output relative largest reforms appearing in countries drastic changes, whether benefit cuts to controlling the growth rate of Social with the least amount of demographic or tax increases, down the road. Security benefits.6 problems? However, the governments in these Personal accounts themselves, One central theme appears to countries are not trusted enough to however, don’t improve or worsen emerge that might help to explain properly save or invest the required Social Security’s financial outlook. these puzzles: the public pension con- additional resources. So, in developed Contrary to some proponents, person- versions appear to represent a funda- countries, the creation of personal al accounts don’t offer a “free lunch” mental distrust in the ability of the accounts is a byproduct of attempts to by reducing Social Security’s shortfall.
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