generational accounting a meaningful way to evaluate fiscal policy this paper illustrates the technique of generational accounting a new way to evaluate fiscal policy that overcomes the inherent ambiguities of traditional deficit accounting the authors illustrate why there is no correct measure of the deficit and how generational accounting estimating the fiscal burdens current policy places on different generations provides a clearer picture of the intergenerational and macroeconomic effects of fiscal policy than any measure of the deficit their calculations suggest that despite recent changes u s fiscal policy is unsustainable in that it will ultimately require future generations to bear a much higher burden than those currently alive

pension profile preferences the influence of trust and expected expenses this paper studies the influence of people s expectations about expenses during retirement and trust in pension funds on preferences for different pension arrangements although most workers prefer

social security pensions and retirement behavior within the family this paper estimates a structural model of family retirement using us data from the health and retirement study hrs it provides further insight into household retirement decision making and the reasons for interdependence in the retirement decisions of each spouse improvements in hrs data and matched employer provided pension histories allow more precise identification of key parameters governing interdependent behaviour within the household in an earlier study we found that interdependence was due to preferences rather than coordination of retirement incentives in the budget and in particular that it is not a correlation in preferences but the appearance of the spouse s retirement status in the husband s and wife s utility function that is largely responsible for coordination of retirement between spouses we now find that a measure of how much each spouse values being able to spend time in retirement with the other accounts for a good portion of that apparent interdependence for the wife the husband s retirement status influences her retirement decision only if she values spending time in retirement with her husband for husbands the effect of having the wife already retired on his retirement decision is roughly doubled if he enjoys spending time in retirement with his wife but there is some effect even if he does not this is consistent with our earlier findings that the husband is more influenced by having a retired spouse than the wife is the increase in the extent of the dependence of the wife s labour supply on the husband s retirement from our past work probably is traceable to better measurement of the opportunity set facing the husband in hrs data once estimated we use the model to investigate the labour supply effects of alternative social security policies examining the effect of dividing credit for earnings evenly between spouses or of basing social security benefits on the amounts accumulated in private accounts both policies change the relative importance of spouse and survivor social security benefits within the household and both raise the relative reward to work later in the life cycle the incentives created are modest and retirement responds accordingly nevertheless at some ages such as 65 there may be as much as a 6 increase in the old age work force under privatized accounts copyright 2004 john wiley sons ltd

retirement in dual career families a structural model a structural econometric model of retirement of dual career couples is specified and estimated with panel data from the national longitudinal survey of mature women a coincidence of spouses retiring together despite the younger ages of wives suggests explicit efforts at coordination the estimates suggest that one reason is a correlation of tastes for leisure more important each spouse and perhaps husbands in particular values retirement more once their spouse has retired the opportunity set accounts for peaks in the retirement hazards of each spouse individually but not for peaks in the simultaneous retirement of both spouses

individual risk in an investment based social security system this paper examines the risk aspects of an investment based defined contribution social security plan we focus on the risk after the plan is fully phased in individuals deposit a fraction of wages to a personal retirement account pra invest these funds in a 60 40 equity debt mix and in a similarly invested annuity at age 67 the value of the assets follows a random walk with mean and variance of a 60 40 equity debt portfolio over the period 1946 95 a mean log return of 5 5 percent net of administrative costs of 0 4 percent and a standard deviation of 12 5 percent we study he stochastic distributions of this process by doing 10 000 simulations of the 80 year experience of the cohort that reached age 21 in 1998 the resulting annuities are compared to the future defined benefits specified in current law the benchmark benefits with no uncertainty a 5 5 percent log return would permit the benchmark benefits to be purchased with pra deposits of 3 1 percent of payroll only one sixth of the pay as you go tax needed for the benchmark benefits saving a higher share of wages provides a cushion that protects the individual from the risk of an unacceptably low level of benefits for example pra deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0 17 and the probability that they are less than 61 percent of the benchmark to 0 05 pra deposits of 9 percent of wages half of the tax rate required in a pay as you go system would substantially reduce these risks this pure investment based plan is an extreme case the investment risk can be reduced further by using a mixed system that combines pay as you go and investment based components or that makes intergenerational transfers conditional on the performance of stock and bond prices this abstract was borrowed from another version of this item

the effect of unions on the structure of wages a longitudinal analysis this paper studies the effects of unions on the structure of wages using an estimation technique that explicitly accounts for misclassification errors in reported union status and potential correlations between union status and unobserved productivity the econometric model is estimated separately for five skill groups using a large panel data set formed from the u s current population survey the results suggest that unions raise wages more for workers with lower levels of observed skills in addition the patterns of selection bias differ by skill group among workers with lower levels of observed skill unionized workers are positively selected whereas union workers are negatively selected from among those with higher levels of observed skill despite a large and sophisticated literature there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an effect of trade unions rather than a consequence of the nonrandom selection of unionized workers over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers 2 one method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status unfortunately longitudinal estimators are highly sensitive to measurement error even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low this sensitivity led lewis 1986 to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects in this paper i present some new evidence on the union wage effect based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status the estimator uses external information on union status misclassification rates along with the reduced form coefficients from a multi variate regression of wages on the observed sequence of union status indicators to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity recognizing that unions may raise wages more or less for

how important is selection experimental vs non experimental measures of the income gains from migration measuring the gain in income from migration is complicated by non random selection of migrants from the general population making it difficult to obtain an appropriate comparison group of non migrants this paper uses a migrant lottery to overcome this problem providing an experimental measure of the income gains from migration new zealand allows a quota of tongans to immigrate each year with a lottery to choose among the excess number of applicants a unique survey conducted by the authors in these two countries allows experimental estimates of the income gains from migration by comparing the incomes of migrants to those who applied to migrate but whose names were not drawn in the lottery after allowing for the effect of non compliance among some of those whose names were drawn the authors also conducted a survey of individuals who did not apply for the lottery comparing this non applicant group with the migrants enables assessment of the degree to which non experimental methods can provide an unbiased estimate of the income gains from migration they find evidence of migrants being positively selected in terms of both observed and unobserved skills as a result non experimental methods are found to overstate the gains from migration by 9 to 82 percent a good instrumental variable works best while difference in differences and bias adjusted propensity score matching also perform comparatively well

the political intergenerational welfare state abstract using a three period overlapping generations economy framework we characterize an intergenerational welfare state with endogenous education and pension under voting we show that although politically establishing pay as you go payg social security in isolation in a dynamically efficient economy will always reduce the capital investment and therefore the social welfare as expected in contrast politically implementing education pension policy package instead can improve both human and physical capital accumulation and social welfare over laissez faire however for this the political influence of the old has to be small thus limiting the size of the payg social security program

retirement effects on health in europe what are the health impacts of retirement as talk of raising retirement ages in pensions and social security schemes continues around the world it is important to know both the costs and benefits for the individual as well as the governments budgets in this paper we use the survey of health ageing and retirement in europe share dataset to address this question in a multi country setting we use country specific early and full retirement ages as instruments for retirement behavior these statutory retirement ages clearly induce retirement but are not related to an individual s health exploiting the discontinuities in retirement behavior across countries we find significant evidence that retirement has a health preserving effect on overall general health our estimates indicate that retirement leads to a 35 percent decrease in the probability of reporting to be in fair bad or very bad health and an almost one standard deviation improvement in the health index while the self reported health seems to be a temporary impact the health index indicates there are long lasting health differences

lifecycle consumption under different income profiles evidence and theory abstract we report on a series of economic decision making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles representing different pension replacement rates we aim to assess whether variations in pension replacement rates might aid or hinder individuals ability to make good lifecycle consumption and saving plans we find that pension replacement rates matter for subjects experimental payoffs and consumption behavior in particular our treatment with a 100 pension replacement rate yields the highest experimental payoff and more subjects in this treatment choose the status quo strategy of consuming endowments in every period we show that a model of rational inattention is useful for explaining subjects responses to different pension replacement rates

structural reform of social security governments around the world have enacted or are currently considering fundamental structural reforms of their social security pension programs the key feature in these reforms is a shift from a pure pay as you go tax financed system in which taxes on current workers are primarily distributed to current retirees to a mixed system that combines pay as you go benefits with investment based personal retirement accounts this paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved it then analyzes the economic gains that would result from shifting to a mixed system i turn next to the three problems that critics raise about any investment based plan administrative costs risk and income distribution finally i comment on some of the ad hoc proposals for dealing with the financial problem of social security without shifting to an investment based system

inequality the urban rural gap and migration using population and product consumption data from the demographic and health surveys i construct comparable measures of inequality and migration for 65 countries including some of the poorest countries in the world i find that the urban rural gap accounts for 40 of mean country inequality and much of its cross country variation one out of every four or five individuals raised in rural areas moves to urban areas as a young adult where they earn much higher incomes than nonmigrant rural permanent residents equally one out of every four or five individuals raised in urban areas moves to rural areas as a young adult where they earn much lower incomes than their nonmigrant urban cousins these flows and relative incomes are suggestive of a world where the population sorts itself geographically on the basis of its human capital and skill i show that a simple model of this sort explains the urban rural gap in living standards

the effects of differential income replacement and mortality on u s social security redistribution we study redistribution via the u s social security retirement system for cohorts of men born during the second half of the 20th century our focus is on redistribution across race and education groups the cohorts we study are younger than cohorts studied in previous similar research and thus more exposed to recent increases in earnings inequality all else equal this should increase the degree of progressivity of social security redistribution due to the structure of the benefit formula however we find that redistribution is only modestly progressive for individuals born as late as 1980 differential mortality rates across race and education groups are the primary explanation while black white mortality gaps have narrowed some in recent years they remain large and dull progressivity mortality gaps by education level are also large and unlike the gaps by race they are widening which puts additional regressive pressure on social security redistribution

effects of social security policies on benefit claiming retirement and saving abstract an enhanced version of a structural model jointly explains benefit claiming wealth and retirement including reversals from states of lesser to greater work the model is estimated with health and retirement study data alternative beliefs about the future of social security affect claiming behavior effects of three potential policies are also examined increasing the early entitlement age increasing the full retirement age and eliminating the payroll tax for seniors predicted responses to increasing the full entitlement age are sensitive to beliefs

should generational accounts replace public budgets and deficits the author assesses the concept of generational accounts and the specific accounts constructed by alan auerbach jagadeesh gokhale and laurence kotlikoff 1991 although these accounts support the assertion of present orientation in fiscal policy they rest on numerous assumptions based on judgments that are open to question these involve the treatment of the public budget constraint the benefits from public exhaustive expenditures economic and population projections the discount rate and fiscal incidence alternative and equally reasonable assumptions could yield radically different conclusions the author concludes that the auerbach gokhale and kotlikoff accounts should not replace the annual public budget as they argue

pension expectations reforms and macroeconomic downturn in italy what can microdata tell us abstractwe use different years of the bank of italy s survey on household income and wealth shiw to explore how italian workers expectations regarding their future level of pension benefits and

rethinking social insurance economics 1 social insurance programs have become the most important the most expensive and often the most controversial aspect of government domestic policy not only in the united states but also in many other countries including developing and industrialized nations in the united states these programs include social security retirement disability and survivor insurance unemployment insurance and medicare insurance for those age 65 and older together these programs accounted for 37 percent of federal government spending and more than 7 percent of gdp in 2003 these ratios have increased rapidly in the past and are projected to increase even faster in the future because of the more rapid aging of the population i will discuss how the major forms of social

early retirement and economic incentives in norway early retirement programmes have gradually reduced the retirement age from 67 to 62 for a majority of the labour force based on micro data for 1990 and 1992 we estimate a competing risk model with three states full retirement partial retirement part time work and full time work we then use the estimated model in simulations to study how financial incentives can be strengthened to extend working life financial incentives educational background and industry affiliation are found to influence retirement behaviour for low and medium incomes the tax system shifts the incentives heavily towards early retirement and in particular towards partial retirement combined with part time work

guaranteeing individual accounts global aging is prompting workers and taxpayers everywhere to recognize their vulnerability to the inherent uncertainty of unfunded social security systems this has generated an international wave of social security reforms over the last two decades prompting more than 20 countries to establish individual account ia plans in the united states the idea of individual accounts has attracted recent interest with the release of the final report of the president s commission to strengthen social security csss here voluntary individual accounts were proposed as a key element of a reformed national old age system see commission to strengthen social security 2001 john f cogan and mitchell 2003 strengths of ia s include the fact that participants gain ownership in their accounts and diversify their pension investments nevertheless ia participants also must bear capital market risk recent market volatility has reminded investors of the importance of capital market fluctuations and their potential impact on retirement income in response some policymakers have suggested that guarantees be designed to help protect ia investments abroad such guarantees have been adopted in several latin american countries undergoing reform and most recently in japan and germany mitchell and kent smetters 2003 sensible public policy recommending the adoption of guarantees must identify their costs and who will pay for them in this paper we discuss how to evaluate such costs in the context of a social security reform that includes ia s along with ways to finance them

health longevity and retirement reform abstract in this paper we study alternative retirement reforms designed to achieve fiscal sustainability in the face of demographic change we are particularly interested in the heterogeneous effects across demographic groups as improvements in health and longevity have not been uniform across the population to this end we develop a dynamic structural life cycle model of heterogeneous agents who face health mortality and income risk we consider the following policy reform measures 1 increasing the early access age to old age retirement 2 raising income taxes 3 lowering old age retirement benefits and 4 lowering old age retirement and disability benefits we find that of the considered policies proportionally lowering old age retirement and disability benefits results in the highest average welfare for all education categories it is also the most successful at boosting employment

changes in labor force participation in the united states the labor force participation rate in the united states increased almost continuously for two and a half decades after the mid 1960s pausing only briefly during economic downturns the pace of growth slowed considerably during the 1990s however and after reaching a record high of 67 3 percent in the first quarter of 2000 participation had declined by 1 5 percentage points by 2005 this paper reviews the social and demographic trends that contributed to the movements in the labor force participation rate in the second half of the twentieth century it also examines the manner in which developments in the 2000s reflect a break from past trends and considers implications for the future

the missing piece in policy analysis social security reform this lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system the social security payroll tax distorts labor supply and the form in which compensation is paid although each individual s benefits are linked to that individual s previous payroll tax payments the low equilibrium rate of return inherent in an unfunded system implies a net payroll tax that causes distortions the resulting deadweight loss is 1 of each year s gdp in perpetuity an amount equal to 20 of payroll tax revenue and a 50 increase in deadweight loss of the personal income tax also there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program the present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded shifting to a funded program cannot reverse the crowding out of capital that has already occurred recognizing the existing unfunded obligation only makes that piece of the national debt explicit but shifting to a funded program limits crowding out of capital formation to the amount that already occurred future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital the present value of these gains is equivalent to a perpetuity of more than 2 of gdp a year the combi nation of improved labor market incentives and higher real return on saving has a net present value gain of more than 15 trillion an amount equivalent to three percent of each future year s gdp forever this abstract was borrowed from another version of this item

underinvestment in a profitable technology the case of seasonal migration in bangladesh hunger during pre harvest lean seasons is widespread in the agrarian areas of asia and sub saharan africa we randomly assign an 8 50 incentive to households in rural bangladesh to temporarily out migrate during the lean season the incentive induces 22 of households to send a seasonal migrant their consumption at the origin increases significantly and treated households are 8 10 percentage points more likely to re migrate 1 and 3 years after the incentive is removed these facts can be explained qualitatively by a model in which migration is risky mitigating risk requires individual specific learning and some migrants are sufficiently close to subsistence that failed migration is very costly we document evidence consistent with this model using heterogeneity analysis and additional experimental variation but calibrations with forward looking households that can save up to migrate suggest that it is difficult for the model to quantitatively match the data we conclude with extensions to the model that could provide a better quantitative accounting of the behavior

is there a consensus among economists in the 1990 s in a 1976 survey kearl et al 1979 hereafter the 1976 survey concluded that the then widespread perception that there was little agreement among professional economists on matters of theory or policy was simply wrong however the most casual empiricism namely the continuing popularity of jokes about disagreements among economists suggests the perception of noneconomists has not changed much since the 1970 s what is the present state of consensus among economists this question is of interest because more than a decade has elapsed since the 1976 survey and during this time many issues confronting economists and the composition of the profession have changed 1 benjamin m friedman and lawrence h summers 1991 p ix for example have asserted that economic thinking in many subfields of the discipline now differs markedly from what it was in 1970 consensus among european economists has been examined by bruno s frey et al 1984 martin ricketts and edward shoesmith 1990 1992 focus exclusively on british economic opinion this paper provides the first general analysis of opinions of u s economists in more than a decade i the survey and questionnaire

learning by working in big cities individual earnings are higher in bigger cities we consider three reasons spatial sorting of initially more productive workers static advantages from workers current location and learning by working in bigger cities using rich administrative data for spain we find that workers in bigger cities do not have higher initial ability as reflected in fixed effects instead they obtain an immediate static premium and accumulate more valuable experience the additional value of experi ence in bigger cities persists after leaving and is stronger for those with higher initial ability this explains both the higher mean and greater dispersion of earnings in bigger cities

fiscal policies capital formation and capitalism abstract this lecture examines the effect of tax policy and social security retirement benefits on capital accumulation and economic welfare the paper begins by examining how capital income taxes reduce the real return to savers and then discusses the welfare loss of capital income taxation relative to the alternatives of taxing consumption and labor income the analysis shows that capital income taxes impose a very substantial deadweight loss even if they do not alter private saving the first section of the paper also discusses the theory and empirical literature on the effect of capital income taxes on national saving the second part of the lecture deals with social security retirement benefits in 1994 the aged members of the u s population will receive cash and medical benefits that cost the government 530 billion or 16 000 per person over age 65 the likely impact of these benefits on private saving and the empirical evidence on this subject are then reviewed the second part of the paper concludes by discussing the welfare loss of unfunded social security benefits and the possibilities for alternative arrangements a final section discusses the implications of international capital flows for this analysis as capital flows become more important particularly in europe the response of government policy may be to compete for foreign capital inflows and to tax domestic savers more heavily this would lead to a smaller total volume of capital the sharp decline in the net national saving rate from more than 8 percent of gdp in the united states in the 1970s to only 4 5 percent in the 1980s and from more than 14 percent of gdp in europe in the 1970s to 9 9 percent in the 1980s may not only create lower real incomes and slower growth but may weaken capitalism itself in the united states a decade of slow growth has increased protectionist tendencies in international trade and led to a new interest in industrial policies that expand the role of government in guiding the direction of technology and of private investment in these ways the government policies that discourage saving might make the schumpeterian vision of a shift from private capitalism to a government dominated economy more likely

naive diversification strategies in defined contribution saving plans there is a worldwide trend toward defined contribution saving plans and growing interest in privatized social security plans in both environments individuals are given some responsibility to make their own asset allocation decisions raising concerns about how well they do at this task this paper investigates one aspect of the task namely diversification it is shown that some investors follow the 1 n strategy they divide their contributions evenly across the funds offered in the plan consistent with this naive notion of diversification it is found that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan

positive versus normative economics what s the connection evidence from the survey of americans and economists on the economy and the general social survey previous research suggests that positive and normative beliefs about economics are largely unrelated using questions from two national surveys this study finds that a the underlying determinants of positive and normative beliefs are strikingly similar b education is by far the strongest overall determinant of both positive and normative beliefs and c the variables known to push positive beliefs in the same direction as formal economic training education male gender income growth and job security also push normative beliefs in the same direction these results strongly suggest that the positive normative connection has been underestimated

the aggregate productivity effects of internal migration evidence from indonesia we estimate the aggregate productivity gains from reducing barriers to internal labor migration in indonesia accounting for worker selection and spatial differences in human capital we distinguish between movement costs which mean workers will move only if they expect higher wages and amenity differences which mean some locations must pay more to attract workers we find modest but important aggregate impacts we estimate a 22 percent increase in labor productivity from removing all barriers reducing migration costs to the us level a high mobility benchmark leads to a 7 1 percent productivity boost these figures hide substantial heterogeneity the origin population that benefits most sees a 104 percent increase in average earnings from a complete barrier removal or a 25 percent gain from moving to the us benchmark

estimating the effects of unions on wage inequality in a panel data model with comparative advantage and nonrandom selection this article considers the estimation of the structure of wages in union and nonunion sectors it proposes an estimator that extends standard panel data techniques to the case in which the return to the permanent component of the error term is differently rewarded in the two sectors the econometric model is used to estimate the effect of unions on both the level and the variance of wages in canada the findings indicate that unions increase the average wage of workers and compress the returns to observable measures of skill and to a time invariant unobservable measure of skill

can social security explain trends in labor force participation of older men in the united states after a long decline the labor force participation rate lfpr of older men in the united states leveled off in the 1980s and began to increase in the late 1990s we examine how changes in social security rules affected these trends we attribute only a small portion of the decline from the 1960s 80s to the increasing generosity of social security over this period increases in the full retirement age and the delayed retirement credit explain one quarter to one half of the recent increase in the lfpr increasing educational attainment and increasing lfpr of married women also contributed to the recent rise

the effect of marginal tax rates on taxable income a panel study of the 1986 tax reform act this paper uses a treasury department panel of more than 4 000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform the analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply the evidence shows an elasticity of taxable income with respect to the marginal net of tax rate that is at least one and could be substantially higher the implications for recent tax rate changes are discussed

why do migrants return to poor countries evidence from philippine migrants responses to exchange rate shocks abstract this paper distinguishes between target earnings and life cycle motivations for return migration by examining how philippine migrants return decisions respond to major unexpected exchange rate changes in their overseas locations due to the asian financial crisis overall the evidence favors the life cycle explanation more favorable exchange rate shocks lead to fewer migrant returns a10 improvement in the exchange rate reduces the 12 month return rate by 1 4 percentage points however some migrants appear motivated by target earnings considerations in households with intermediate foreign earnings favorable exchange rate shocks have the least effect on return migration but lead to increases in household investment

the effects of health insurance and self insurance on retirement behavior this paper provides an empirical analysis of the effects of employer provided health insurance medicare and social security on retirement behavior using data from the health and retirement study we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses our results suggest that medicare is important for understanding retirement behavior and that uncertainty and saving are both important for understanding the labor supply responses to medicare half the value placed by a typical worker on his employer provided health insurance is the value of reduced medical expense risk raising the medicare eligibility age from 65 to 67 leads individuals to work an additional 0 074 years over ages 60 69 in comparison eliminating 2 years worth of social security benefits increases years of work by 0 076 years

reevaluating agricultural productivity gaps with longitudinal microdata recent research has pointed to large gaps in labor productivity between the agricultural and nonagricultural sectors in low income countries as well as between workers in rural and urban areas most estimates are based on national accounts or repeated cross sections of micro survey data and as a result typically struggle to account for individual selection between sectors this paper contributes to this literature using long run individual level panel data from two low income countries indonesiaand kenya accounting for individual fixed effects leads to much smaller estimated productivity gains from moving into the non agricultural sector or urban areas reducing estimated gaps by over80 percent per capita consumption gaps between non agricultural and agricultural sectors as well as between urban and rural areas are also close to zero once individual fixed effects are included estimated productivity gaps do not emerge up to five years after a move between sectors nor are they larger in big cities we evaluate whether these findings imply a re assessment of the currentconventional wisdom regarding sectoral gaps discuss how to reconcile them with existing crosssectional estimates and consider implications for the desirability of sectoral reallocation of labor

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

the retirement consumption puzzle evidence from a regression discontinuity approach in this paper we investigate the size of the consumption drop at retirement in italy we use micro data on food and total non durable household spending covering the period 1993 2004 and evaluate the change in consumption that accompanies retirement by exploiting the exogenous variability in pension eligibility to correct for the endogenous nature of the retirement decision we take a regression discontinuity design approach and make the identifying assumption that consumption would be the same around the threshold for pension eligibility if individuals would not retire we check in our data that a non negligible fraction of individuals retire as soon as they become eligible and estimate at 9 8 the part of the non durable consumption drop that is associated with retirement induced by eligibility we show that such fall is not driven by liquidity problems for the less well off in the population and can be accounted for by drops in goods that are work related expenses or leisure substitutes however we also show that retirement induces a significant drop in the number of grown children living with their parents and this can account for most of the retirement consumption drop

the effect of income taxes on household income research on the distribution of income during the 1980s has identified a trend towards increasing inequality which may be the continuation and acceleration of trends spanning several decades this paper explores to what extent behavioral responses to the tax changes during the 1980s may also explain the rising inequality the 1986 tax reform act is used as a natural experiment to explore the roles played by both taxes and a variety of nontax factors our principal finding is that both tax rates and nontax factors appear to have had significant effects on relative income growth during the late 1980s

how family status and social security claiming options shape optimal life cycle portfolios we show how optimal household decisions regarding work retirement saving portfolio allocations and life insurance are shaped by the complex financial options embedded in u s social security rules and uncertain family transitions our life cycle model predicts sharp consumption drops on retirement an age 62 peak in claiming rates and earlier claiming by wives versus husbands and single women moreover life insurance is mainly purchased on men s lives our model which takes social security rules seriously generates wealth and retirement outcomes that are more consistent with the data in contrast to earlier and less realistic models

optimal financial knowledge and wealth inequality we show that financial knowledge is a key determinant of wealth inequality in a stochastic life cycle model with endogenous financial knowledge accumulation where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance moreover because of how the us social insurance system works better educated individuals have most to gain from investing in financial knowledge our parsimonious specification generates substantial wealth inequality relative to a one asset saving model and one in which returns on wealth depend on portfolio composition alone we estimate that 30 40 percent of retirement wealth inequality is accounted for by financial knowledge

does social security privatization produce efficiency gains while privatizing social security can improve labor supply incentives it can also reduce risk sharing we analyze a 50 privatization using an overlapping generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty when wage shocks are insurable privatization produces about 18 100 of extra resources for each future household after all transitional losses have been compensated for with lump sum taxes when wages are not insurable privatization reduces efficiency by about 2 400 per future household we check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions first privatization performs better in a closed economy where interest rates decline with capital accumulation than in an open economy second privatization also performs better when an actuarially fair private annuity market does not exist third government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually cause harm

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

the effect of pension reform on pension benefit expectations and savings decisions in japan using the japanese study of aging and retirement jstar which is a new japanese panel survey of people aged 50 and over we find that more japanese in their early 50s expect their level of public pension benefits to decline compared with those in their late 50s and early 60s we also find that recent pension reforms that raised the pensionable age affected the japanese population by increasing the age at which they expect to claim their benefits by almost the exact same amount as the increase in the pensionable age the reforms have also decreased the population s expectations about receiving public pension benefits although this effect is not necessarily significant we also find evidence that anxiety about the public pension programme s future increases private savings

disability transfers self reported health and the labor force attachment of older men evidence from the historical record we use trends in self reported disability to gauge the impact of the growth of disability transfer programs on the labor force attachment of older working aged men our tabulations suggest that between 1949 and 1987 about half of the 4 9 percentage point drop in the labor force participation of men aged 45 54 and between one quarter and one third of the 19 9 point drop among men aged 55 64 represented a movement of men out of the labor force and onto the rolls of transfer programs targeted at the disabled since the expansion of transfer programs represents only one of the forces behind this movement these figures represent upper bounds on the impact of such programs on work force attachment

the future of social security we analyze the effect of the projected demographic transition on the political support for social security and equilibrium outcomes embedding a probabilistic voting setup of electoral competition in the standard olg model with capital accumulation we find that intergenerational transfers arise in the absence of altruism commitment or trigger strategies closed form solutions predict population ageing to lead to higher social security tax rates a rising share of pensions in gdp but eventually lower social security benefits per retiree the response of equilibrium tax rates to demographic shocks reduces old age consumption risk calibrated to match features of the u s economy the model suggests that in response to the projected demographic transition social security tax rates will gradually increase to 16 other policies that distort labor supply will become less important labor supply therefore will rise in contrast with frequently voiced fears

perspectives from the president s commission on social security reform recently we were asked to serve on the president s commission to strengthen social security csss along with 14 other members drawn equally from both major political parties the commission s charge was to provide recommendations to modernize the social security system restore its fiscal soundness and develop a workable system of personal retirement accounts this paper explains how the commission arrived at some of its recommendations and the role that economics played in contributing to these recommendations we describe the key institutional constraints confronting efforts to reform social security and how these constraints influenced commission decisions we also illustrate how economics research influenced the commission s analysis of how to structure personal accounts ways to enhance traditional social security program finances and means of measuring the extent of financial progress achieved through reform

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

different approaches for dealing with social security he u s social security system is a government pension program financed by worker payroll taxes as workers pay in their payroll taxes they accumulate credits toward benefits in the language of pensions this is a defined benefit plan at any point in time one can project tax inflows and benefit outflows based on various economic and demographic assumptions and determine the long run actuarial soundness of the system or to put it another way determine whether the present set of tax and benefit schedules will be consistent in the long term every year such forecasts are made by the social security and medicare trustees now three cabinet officers the commissioner of social security and two outside members social security and medicare boards of trustees 1995 every four years a quadrennial advisory council is appointed to review these forecasts and to comment on relevant policy issues in the past many of these councils have had important impacts on social security policy for example the 1983 greenspan commission proposed a number of measures that saved the system from imminent financial difficulty and the 1975 council recommended changing procedures that had until then led to overindexation of social security for inflation another advisory council was formed in 1994 and i was asked to chair it it also included three members from business three from unions and six others from the private pension industry the self employment sector and independent

does postponing minimum retirement age improve healthy behaviors before retirement evidence from middle aged italian workers abstract by increasing the residual working horizon of employed individuals pension reforms that rise minimum retirement age can affect individual investment in health promoting behaviors before retirement using the expected increase in minimum retirement age induced by a 2004 italian pension reform and a difference in differences research design we show that middle aged italian males affected by the reform reacted to the longer working horizon by increasing regular exercise with positive consequences for obesity and self reported satisfaction with health

migration and economic mobility in tanzania evidence from a tracking survey this study explores the extent to which migration has contributed to improved living standards of individuals in tanzania using longitudinal data on individuals the authors estimate the impact of migration on consumption growth between 1991 and 2004 the analysis addresses concerns about heterogeneity and unobservable factors correlated with both income changes and the decision to migrate the findings show that migration adds 36 percentage points to consumption growth during a period of considerable growth in consumption these results are robust to numerous tests and alternative specifications unpacking the findings the analysis finds that moving out of agriculture is correlated with much higher growth than staying in agriculture although growth is always higher in any sector if one physically moves economic mobility is strongly linked to geographic mobility the puzzle is why more people do not move if returns to geographic mobility are high the evidence is consistent with models in which exit barriers are set by home communities through social and family norms that prevent migration of certain categories of people

antisocial security the puzzle of beggar thy children policies the u s social security program has irrevocably transferred substantial wealth from workers to their ostensibly altruistic parents after some alternative explanations for this paradox are addressed a formal model is developed to show that a majority of rational voters who care about their descendants can support the preservation of current benefits for themselves but accept the prospect of social security s future retrenchment incorporating elements of tabellini s 2000 positive theory of social security and benabou and ok s 2001 analysis of income mobility the model identifies specific forces affecting this time varying individual support for social security these forces are embodied in three hypotheses related to income mobility relative income level and age an ordered logit analysis of cumulative anes data supports these hypotheses

tax avoidance and the deadweight loss of the income tax traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption the full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure excludable income and deductible consumption are a hicksian composite good microeconomic estimates imply a deadweight loss of as much as 30 of revenue or more than ten times harberger s classic 1964 estimate the relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed 2 per 1 of revenue

offering versus choice in 401 k plans equity exposure and number of funds records of over half a million participants in more than 600 401 k plans indicate that participants tend to allocate their contributions evenly across the funds they use with the tendency weakening with the number of funds used the number of funds used typically between three and four is not sensitive to the number of funds offered by the plans which ranges from 4 to 59 a participant s propensity to allocate contributions to equity funds is not very sensitive to the fraction of equity funds among offered funds the paper also comments on limitations on inferences from experiments and aggregate level data analysis how much and how to save for retirement is one of the most important financial decisions made by most people defined contribution dc pension plans such as the popular 401 k plans are important instruments of such savings by 2001 year end about 45 million american employees held 401 k plan accounts with a total of 1 75 trillion in assets holden and vanderhei 2001 an important characteristic of these plans is that the participant has responsibility over his savings among a plan s various funds how responsibly do the participants behave in particular how sensitive are participants choices to possible framing effects associated with the menu of choices they are offered to explore these questions this paper analyzes a data set recently provided by the vanguard group consisting of records of more than half a million participants in about 640 dc plans these plans offer between 4 and 59 funds in which participants can invest all plans offer at least one stock fund 635 plans

life expectancy and old age savings rich people women and healthy people live much longer than their poor male and sick counterparts two extremes taken from our analysis of single people in the assets and health dynamics of the oldest old ahead dataset illustrate this point an unhealthy 70 year old male at the twentieth percentile of the permanent income distribution expects to live only 6 more years that is to age 76 in contrast a healthy 70 year old woman at the eightieth percentile of the permanent income distribution expects to live 16 more years thus making it to age 86 such significant differences in life expectancy could all else equal lead to significant differ ences in saving behavior a related observation is that people with high permanent incomes keep large amounts of assets until very late in life table 1 also based on the

an increase in the retirement age in china the regional economic effects abstractchina s pension system is in need of comprehensive reform one measure on which we focus is to increase the retirement age it is likely that a change in retirement age will have significantly different effects across china s regions interregional disparities are already very substantial in china and it will be important to know how changes in pension arrangements will affect disparities we consider four policies to increase the retirement age from 60 to 61 they differ according the use made of the extra revenue generated by the policy all four policies increase welfare and reduce the interregional welfare gap

does the ndc scheme mimic the french point system after the implementation of the notional defined contribution ndc pension scheme in italy and sweden in the 90s some authors argued that its design merely replicates the functioning of the poin

how effective is redistribution under the social security benefit formula abstract this paper uses earnings histories from the social security administration linked to the survey responses for participants in the health and retirement study to investigate redistribution under the current social security benefit formula as advertised own benefits are significantly redistributed from individuals with high to those with low lifetime earnings however redistribution is roughly halved when spouse and survivor benefits are taken into account and redistribution is measured among families when families are arrayed by total earnings during years when both spouses are engaged in substantial work there is very little redistribution from families with high to low earnings capacity

trends in male labor force participation and retirement some evidence on the role of pensions and social security in the 1970 s and 1980 s this article estimates the effects of changes in pension plans and social security in the 1970s and 1980s on the steady state retirement of men work incentives associated with pension coverage and plan characteristics are calculated primarily from the 1969 79 retirement history study and the 1983 and 1989 surveys of consumer finances simulations with a structural retirement model suggest that the long run effects of changes in pension plans and social security account for about a quarter of the reduction in full time work by men in their early sixties but cannot explain the reduction by those age 65

labour market responses to immigration evidence from internal migration driven by weather shocks we study the labour market impact of internal migration in indonesia by instrumenting migrant flows with rainfall shocks at the origin area estimates reveal that a one percentage point increase in the share of migrants decreases income by 0 97 and reduces employment by 0 24 percentage points these effects are different across sectors employment reductions are concentrated in the formal sector while income reduction occurs in the informal sector negative consequences are most pronounced for low skilled natives even though migrants are systematically highly skilled we suggest that the two sector nature of the labour market may explain this pattern

pay as you go or funded social security a general equilibrium comparison abstract this paper demonstrates that the analysis of fiscal sustainability of social security must include the education funding dimension of public policy which affects the productivity of future workers this fact is true under both social security regimes pay as you go payg and fully funded ff we consider an olg economy where the government in addition to running social security also funds education via a dedicated tax the education tax rates are chosen in each period by a majoritarian rule we demonstrate contrary to conjectures in the literature that the ff social security system produces political support for a relatively higher compared to payg education funding and hence generates higher rates of human capital accumulation physical capital accumulation and economic growth furthermore it also results in a comparatively lower degree of income inequality

human capital and development accounting new evidence from wage gains at migration we use new data on the pre and postmigration wages of immigrants to the united states to measure wage gains at migration the average immigrant from a middle income or poor country increases their wage by a factor of two to three upon migration this wage gain is small relative to the underlying gap in gdp per worker in a development accounting framework this finding implies that switching countries accounts for 40 of cross country income differences while human capital accounts for 60 wage gains decline with education consistent with imperfect substitution between skill types we augment our analysis to allow for this possibility and bound the human capital share in development accounting to between one half and two thirds we also provide results on the importance of premigration sector of employment assimilation and skill transfer

retirement expectations pension reforms and their impact on private wealth accumulation abstract we estimate the effect of pension reforms on households expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of intense italian pension reforms as a source of exogenous variation in expected pension wealth the survey of household income and wealth a large random sample of the italian population elicits expectations of the age at which workers expect to retire and of the ratio of pension benefits to pre retirement income between 1989 and 2002 we find that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth particularly by workers that are better informed about their pension wealth

the trend in retirement a model with leisure production and endogenous retirement is used to explain declining labor force participation rates of elderly males the model is calibrated to cross sectional data on labor force participation rates of u s males by age their drop in consumption and leisure good expenditure share in 2000 running the calibrated model for the period 1850 2000 a prediction of the evolution of the cross section is obtained the model accounts for more than 87 of the increase in retirement of men over 65 the increase in retirement is driven by rising wages and falling prices of leisure goods

pension reform and labor supply abstract we exploit a comprehensive restructuring of the early retirement system in norway in 2011 to examine labor supply responses to increases in work incentives and actuarially neutral reductions in the age of first access to pension benefits we find that increasing the returns to work is a powerful policy the removal of an earnings test implying a doubling of the average net take home wage led to an increase in average labor supply by 7 h per week 30 at age 63 and by 8 h 46 at age 64 the responses primarily came at the extensive margin in contrast reducing the access age has almost no effect on labor supply in our setting with actuarially fair work incentives

the elasticity of taxable income evidence and implications abstract a central tax policy parameter that has recently received much attention but about which there is substantial uncertainty is the overall elasticity of taxable income we provide new estimates of this elasticity which address identification problems with previous work by exploiting a long panel of tax returns to study a series of tax reforms throughout the 1980s this identification strategy also allows us to provide new evidence on both the income effects of tax changes on taxable income and on variation in the elasticity of taxable income by income group we find that the overall elasticity of taxable income is approximately 0 4 the elasticity of real income not including tax preferences is much lower we estimate small income effects of tax changes on reported income implying that the compensated and uncompensated elasticities of taxable income are very similar we estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above 100 000 per year who have an elasticity of 0 57 while for those with incomes below 100 000 per year the elasticity is less than one third as large moreover high income taxpayers who itemize are particularly responsive to taxation our estimates suggest that optimal tax structures may feature tightly targeted transfers to lower income taxpayers and a flat or even declining marginal rate structure for middle and high income taxpayers

skill transferability migration and development evidence from population resettlement in indonesia we use a natural experiment in indonesia to provide causal evidence on the role of location specific human capital and skill transferability in shaping the spatial distribution of productivity from 1979 1988 the transmigration program relocated two million migrants from rural java and bali to new rural settlements in the outer islands villages assigned migrants from regions with more similar agroclimatic endowments exhibit higher rice productivity and nighttime light intensity one to two decades later we find some evidence of migrants adaptation to agroclimatic change overall our results suggest that regional productivity differences may overstate the potential gains from migration

international migration self selection and the distribution of wages evidence from mexico and the united states we use the 1990 and 2000 mexican and u s population censuses to test borjas s negative selection hypothesis that the less skilled are those most likely to migrate from countries with high skill premia earnings inequality to countries with low skill premia earnings inequality we find that mexican immigrants in the united states are more educated than nonmigrants in mexico and were mexican immigrants to be paid according to current skill prices in mexico they would be concentrated in the middle of mexico s wage distribution these results are inconsistent with the negative selection hypothesis and instead suggest that there is intermediate selection of immigrants from mexico

the effects of recent spanish pension reforms on sustainability and pension adequacy the spanish pension system has been recently reformed as a response to the demographic challenge and with the objective of ensuring the sustainability of the pension system in the long term the ov