Working Paper: NBER ID: w14682
Authors: Alan J. Auerbach; Ronald Lee
Abstract: We evaluate several actual and hypothetical sustainable PAYGO pension structures, including: (1) versions of the US Social Security system with annual adjustments of taxes or benefits to maintain fiscal balance; (2) Sweden's Notional Defined Contribution system and several variants developed to improve fiscal stability; and (3) the German system, which also includes annual adjustments to maintain fiscal balance. For each system, we present descriptive measures of uncertainty in representative outcomes for a typical generation and across generations. We then estimate expected utility for generations based on simplifying assumptions and incorporate these expected utility calculations in an overall social welfare measure. Using a horizontal equity index, we also compare the different systems' performance in terms of how neighboring generations are treated.\n\nWhile the actual Swedish system smoothes stochastic fluctuations more than any other and produces the highest degree of horizontal equity, it does so by accumulating a buffer stock of assets that alleviates the need for frequent adjustments. In terms of social welfare, this accumulation of assets leads to a lower average rate of return that more than offsets the benefits of risk reduction, leaving systems with more frequent adjustments that spread risks broadly among generations as those most preferred.
Keywords: Pension Systems; Generational Equity; Welfare; Sustainability
JEL Codes: H55; J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Swedish NDC system (H60) | higher degree of horizontal equity (D63) |
| Swedish NDC system (H60) | lower average rates of return (G19) |
| lower average rates of return (G19) | trade-off between risk reduction and expected returns (G11) |
| pension reforms adjusting taxes or benefits (H55) | little effect on incentives for work or saving (H31) |
| structural design of pension systems (H55) | implications for economic behavior and welfare (D69) |
| different plans (P11) | varying levels of uncertainty faced by generations (D84) |
| varying levels of uncertainty faced by generations (D84) | affects their welfare (I30) |