An assessment of the effects of proposed reductions in income and Social Security taxes on middle-income Americans and of cuts in health care spending, using the generational accounting method to ...examine their likely impact on both current and future national saving rates.
Distingiishing "spot" versus "contract" views of the labor market is of critical importance to a host of economic issues ranging from wage flexibility over the business cycle to firm financial ...valuation. The structural features of U.S. private pension plans permit surprisingly strong inferences concerning the incentive effects of private pension plan provisions and the contractual nature of the U.S. labor market. This paper examines the accrual of vested pension benefits of a nation-wide sample of pension plans. We find strikingly larged is continuities in the profile by age of the ratio of annual accrued pension benefits to the standard wage. These discontinuities primarily occur at the ages of full vesting and early retirement. Representative plans often exhibit absolute changes in accrual ratios of 20 to 30 percentage points at these ages.The provisions of many plans imply large negative accruals after the age of early retirement. Job change typically involves a large loss in pension wealth as well. Since the average worker's marginal product presumably changes smoothly as he or she ages, these pension data can only be reconciled with spotmarket clearing if age wage profiles within a firm exhibit exactly offsetting discontinuities at key ages. Casual inspection of firm wage setting behavior rules out this requirement of spot market clearing. In our view the magnitude,patterns, and variations in pension accrual ratios are strikingly at odds with spot market equilibrium. While market clearing in longer term contracts seems the only equilibrium theory consistent with these findings, it also strains our credulity to ascribe optimizing behavior to the pension accrual profiles chosen by a vast array of U.S. businesses. In the process of presenting these profiles we also consider the following questions concerning U.S. pensions. What are the incentive effects of private pension plans? What is the cost in pension benefits of job turnover? How important is vesting? Is there a cost in pension benefits of foregoing the early retirement option? Do pension stipulations encourage early retirement? While the considerable heterogeneity of pension plan provisions permits no simple or single answer to these questions, the data suggest that pensions can have major incentive effects on job turnover and retirement. In general pensions represent a very significant factor, and at certain ages, a dominant factor in employee compensation.
Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national ...saving. It decomposes postwar changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: The redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare, and Medicaid benefits. The increase in the elderly's consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare, and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed.
This paper addresses three questions related to limits on DC contributions. The first is whether statutory limits on tax-deductible contributions to defined contribution (DC) plans are likely to be ...binding, focusing on households in various economic situations. The second is how large is the tax benefit from participating in defined contribution plans. The third is how does the defined contribution tax benefit depend on the level of lifetime income. We find that the statutory limits bind those older middle-income households who started their pension savings programs late in life, those who plan to retire early, single-earner households, those who are not borrowing constrained, and those with rapid rates of real wage growth. Most households with high levels of earnings, regardless of age or situation, are also constrained by the contribution limits. Lower or middle-income two-eamer households that can look forward to modest real earnings growth are likely to be borrowing constrained for most of their pre-retirement years because of the costs of paying a mortgage and sending children to college. These households are not in a position to save the 25 percent of earnings allowed as a contribution to DC plans. Some of these middle-income households, however, are constrained by the $10,500 limit on elective employee contributions to 401(k) plans if the households have access to only these plans and their employers make no pension contributions for them. The borrowing constraints faced by many lower- and middle-income Americans means that contributions to DC plans must come at the price of lower consumption when young and the benefit of higher consumption when old. Indeed, for a stylized household earning $50,000, consistently contributing 10 percent of salary to a DC plans that earns a 4 percent real return means consuming almost two times more when old than when young. Measured as a share of lifetime consumption, the tax benefit from participating in a DC plan can be significant. Assuming annual contribution rates at the average of the maximum levels allowed by employers in 401 (k) plans and assuming a 4 percent real return on DC and non-DC assets, the benefit is 2 percent for two-earner households earning $25,000 per year, 3.4 percent for those earning $100,000 per year, and 9.8 percent for those earning $300,000 per year...
This paper analyzes questions related to defined contribution (DC) plans. For what types of households are statutory contribution limits likely to bind? How large is the lifetime tax benefit from ...participating in a DC plan and how does it vary with lifetime income? The authors find that contribution limits bind for households that begin their plan participation late in life or wish to retire early, single-earner households, those who are not borrowing-constrained, those with rapid rates of real wage growth, and those with high levels of earnings regardless of age. Setting contribution rates at the average maximum level allowed by employers and assuming a 4% real return on assets, the lifetime benefit rises from 2% of lifetime consumption for households earning $25,000 per year, to 9.8% for those earning $300,000 per year. Contribution ceilings limit the benefit for high earners and are sensitive to the assumed rate of return.
The U.S. and other western economies are experiencing dramatic changes in growth and age structure of their populations. Fluctuations in birth rates are the most important determinants of these ...changes in the post war period. This paper examines the dynamic effects of baby "booms" and baby"busts" on a range of economic variables using a perfect foresight life cycle simulation model. In addition to describing general transition (as opposed to simply long run) affects of fertility change, the paper considers alter-native Social Security policies for avoiding sharp increases in long run payroll tax rates. These include reductions in benefit replacement rates,advances in Social Security's retirement age, taxation of social security benefits, and the accumulation of a significant Social Security trust fund. According to the simulated demographic transitions, the savings inthe U.S. fertility currently underway can have very major impacts on long run factor returns and produce percipitous short term changes in saving rates. While Social Security policy has important effects on the simulated demographic transitions, these effects are of secondary importance to the long run level of economic welfare. Even if payroll tax rates rise dramatically, long run welfare (measured in terms of levels of adult consumption and leisure) is, nonetheless, substantially higher in the case of a sustained dropin the fertility rate. This reflects, in part, the decline in the number of dependent children per adult; while a sustained decline in the fertility rate eventually means a much larger ratio of elderly per capita, the decline in children per capita means an overall decline in the long run ratio of dependents to prime age workers in the economy. A second explanation for the simulated long run welfare gains is capital deepening associated with lower population growth rates.