Concern with intergenerational justice has long been a focus of economics. This essay considers the effort, over the last three decades, to quantify generational fiscal burdens using label-free ...fiscal gap and generational accounting. It also points out that government debt -- the conventional metric for assessing generational fiscal justice,– has no grounding in economic theory. Instead, official debt is the result of economically arbitrary government labelling decisions: whether to call receipts “taxes” rather than “borrowing” and whether to call payments “transfer payments” rather than “debt service”. Via their choice of words, governments decide which obligations to put on, and which to keep off, the books. The essay also looks to the future of generational fiscal-justice analysis. Rapid computational advances are permitting economists to understand not just direct government intergenerational redistribution, but also how such policies impact the economy that future generations will inherit.
Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium ...overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes, which crowd out savings and slow real wage growth below the rate of technological progress. A faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them. Addressing the financing problem by reducing Social Security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees. By contrast, a pre-funding of Social Security financed with consumption taxes more evenly spreads the welfare losses across generations, and it helps future generations, especially the poor, by stimulating capital formation.
Is Uncle Sam Inducing the Elderly to Retire? Auerbach, Alan J.; Kotlikoff, Laurence J.; Koehler, Darryl ...
Tax policy and the economy,
01/2017, Letnik:
31, Številka:
1
Journal Article
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Many, if not most, baby boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly ...raise Social Security, Medicare, and Medicaid benefits, boomers must look to their own devices to rescue their retirements, namely, working harder and longer. However, the incentive of boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is Medicaid and Social Security’s complex earnings test and clawback of disability benefits. This study measures the work disincentives confronting those age 50 to 79 from the entire array of explicit and implicit fiscal work disincentives. Specifically, the paper runs older respondents in the Federal Reserve’s 2013 Survey of Consumer Finances through The Fiscal Analyzer—a software tool designed, in part, to calculate remaining lifetime marginal net tax rates.
We find that working longer, say an extra five years, can raise older workers’ sustainable living standards. But the impact is far smaller than suggested in the literature, in large part because of high net taxation of labor earnings. We also find that many baby boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of our fiscal system. A third finding is that the marginal net tax rate associated with a significant increase in earnings, say $20,000 per year, arising from taking a full-time or part-time job (which could be a second job) can, for many elderly, be dramatically higher than that associated with earning a relatively small, say $1,000 per year, extra amount of money. This is due to the various income thresholds in our fiscal system. We also examine the elimination of all transfer program asset and income testing. This dramatically lowers marginal net tax rates facing the poor. Another key finding is the enormous dispersion in effective marginal remaining lifetime net tax rates facing seemingly identical households, that is, households with the same age and resource level. Finally, we find that traditional, current-year (i.e., static) marginal tax calculations relating this year’s extra taxes to this year’s extra income are woefully off target when it comes to properly measuring the elderly’s disincentives to work.
Our findings suggest that Uncle Sam is, indeed, inducing the elderly to retire.
Summary
Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, the focus of this paper, is an ...expected path of economic risk. To isolate the climate-risk problem, we consider three mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature and the connection between temperature and damages. By construction, our model exhibits a de minimis climate problem absent its shocks. However, due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large as, or larger than, the carbon average-damage tax, which is focused exclusively on limiting average damage.
The Excess Burden of Government Indecision Gomes, Francisco J.; Kotlikoff, Laurence J.; Viceira, Luis M.
Tax policy and the economy,
06/2012, Letnik:
26, Številka:
1
Journal Article
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Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions ...relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, life span, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, labor supply, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6% of the agent’s economic resources. This is a significant distortion in and of itself. It is also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.
Why aren't developed countries saving? Dobrescu, Loretti I.; Kotlikoff, Laurence J.; Motta, Alberto
European economic review,
August 2012, 2012-08-00, 20120801, Letnik:
56, Številka:
6
Journal Article
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National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 23% ...and 19% of national income in 1970, but only 9% and 4% respectively in 2008. Japan saved almost 33% in 1970, but only 7% in 2008. And the U.S. saved around 11% in 1970, but only 1% in 2008. What explains these international and intertemporal differences? Is it demographics, government spending, productivity growth or preferences?
For the U.S. and France, whose saving behavior we study, preferences appear to be an important factor. American and French societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. Government spending also appears to be one of the reasons why France is saving at much lower rates. These conclusions emerge from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending, productivity, and social preferences. The two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies' spending and labor supply decisions.
► National saving rates are dramatically declining across developed countries. ► We use the method of moments to estimate two models for the U.S. and France. ► In model 1, current social decision makers always remain in charge. ► In model 2, social decision makers change through time. ► We find that shifts in societal preferences are the principal reason for the decline in national rates of saving.
Social Security needs to be fundamentally reformed without undermining its legitimate mission — forcing people to save and insure and providing forms of social insurance that the private market would ...either not provide or provide poorly. Although the system has done great good, it is incomprehensible, inefficient, inequitable, and, most important, insolvent. This paper lays out a simple, modern version of Social Security that Bismarck would surely support. My proposed Personal Security System is fully funded, transparent, efficient, fair, and progressive. It features personal accounts that are collectively invested by the government (not Wall Street) at zero cost to workers.
This paper projects China's national savings through 2040 based on China's national account data, demographic data, and data on rural and urban life‐cycle income and consumption. Our baseline ...projections show that China's national saving in 2040 will be 16 times the current national saving. The annual growth rate of wealth will decline from 16.3 percent in 2012 to 9.5 percent in 2040. Lowering the growth rate of wealth accumulation to the current rate of return to wealth increases consumption through 2040; lowering the growth rate of wealth further may increase consumption more in the short run, but less in the long run.
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