Tuesday, June 22, 2010

Politically feasible reform of social security

In many countries, social security systems face obvious challenges, yet little has been done about it so far. That is either because it is not possible to muster political support for it, or because politicians believe that is not possible. Let us have a look at this using some theory.

Georges Casamatta and João Gondim use a continuous time overlapping generations model to study out the parameters of a pay-as-you-go system can be modified in the face of a permanent negative fertility shock. cutting pensions benefits or delaying the retirement age find a majority of supporters, increasing the contribution rate does not. A critical aspect here is the status quo: an increase in the income tax necessary to balance the social security budget. Too often, people compare a reform to the current policy, instead of thinking what emergency reform would have to be performed once the shock has impacted.

People favor a cut in benefits even though it decreases their lifetime consumption because it gives a better stream of consumption through their life cycle, i.e., they are fine with having more now and less alter. Which also means an increase in the payroll tax is not acceptable. And an increase in the retirement age achieves the same objective, again compared to a status quo with a high tax rate, and also to the two other policy moves.

This assumed the changes in policy were applied at the moment the fertility shock happened. Delaying it changes preferences, and depending on demographics, things can go towards favoring one or the other policy change.

7 comments:

Mark B. said...

It seems that people often don't want to deal with a problem until its right in front of them. I think this is especially true in politics because so many politicians are only looking as far as the next election.

agentcontinuum said...

And then there's always some kind of individual accounts + subsidy, that is, get rid of the pay-as-you-go aspect all together while keeping the mandatory savings + minimum "safety net" parts.

Some countries did this already. Any news on how it's going? This is really not my literature, so any references are welcome.

Vilfredo said...

Previous post by EL saying that a reform is possible here.

Kansan said...

It is the same as increasing fuel taxes and reducing income taxes in counterpart: it makes sense, people understand that, and politicians are still afraid.

stacey said...

YES kANSAS you are right and i wonder why they are afraid

blissettluther said...
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rosserjb@jmu.edu said...

These authors claim that while raising the retirement age is acceptable, raising the payroll tax is not in social security changes. But the combination of the two is exactly what was done during that last major change in social security in 1982 as a result of the Greenspan Commission recommendations, supported by tax-cutting President Reagan. Are these authors aware of this when they promulgate this supposed lack of acceptabililty, or are they just ignorant?