Working Paper: NBER ID: w7031
Authors: John McHale
Abstract: Against a background of projections of sharply increasing elderly dependency rates, workers in the major industrial economies are apprehensive that their social security benefit entitlements will be cut before or after they retire, leaving them with inadequate retirement income. This paper looks at recent benefit rule changes in the G7 countries to see what can be learned about such political risk in PAYG pension systems. From this small sample, I find that projections of rising costs under current rules are inducing reforms, and that these reforms often have a major impact on the present discounted value of promised benefits for middle-aged and younger workers. Usually, however, the benefits of the retired and those nearing retirement are protected. The phasing in of benefit cuts raises the question as to why younger workers are willing to take significant cuts in their implicit wealth while protecting the currently old. One possible answer is explored through a simple model: these workers fear even larger cuts in their benefits if the tax burden on future workers rises too high.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political risk (P26) | social security benefit rule changes (H55) |
| rising costs under current benefit rules (J32) | reforms in PAYG pension systems (H55) |
| reforms in PAYG pension systems (H55) | present discounted value of promised benefits for younger and middle-aged workers (J32) |
| expected future tax burden (H22) | support for benefit cuts by younger workers (J32) |
| political risk (P26) | reductions in gross social security wealth (SSW) for younger workers (H55) |