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SOCIAL SCIENCE RESEARCH NETWORK
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 7, No. 13: May 26, 2006
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Social Security
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T A B L E O F C O N T E N T S
"Political Risk versus Market Risk in Social Security"
JOHN B. SHOVEN
Stanford University - Department of Economics,
National Bureau of Economic Research (NBER)
SITA N. SLAVOV
Occidental College - Department of Economics
"Public Policy and the Transition to Private Pension Provision
in the United States and Europe"
ONORATO CASTELLINO
University of Turin - Faculty of Economics
ELSA FORNERO
University of Turin - Department of Economics,
Center for Research on Pensions and Welfare Policies
(CeRP)
"The Role of Earnings and Financial Risk in Distributional
Analyses of Social Security Reform Measures"
THOMAS L. HUNGERFORD
Congressional Research Service
"Reforming Public Pensions in the US and the UK"
PETER A. DIAMOND
Massachusetts Institute of Technology (MIT) -
Department of Economics, National Bureau of Economic
Research (NBER)
"Changes in the OASI Benefit Distribution Under Various Social
Security Reform Alternatives"
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
"Social Security: Reliance on Cash Flow Accounting and
Projections Disguises an Inherent Upside Cash Flow Bias"
DAVID MOSSO
Government of the United States of America - Federal
Accounting Standards Advisory Board
"Social Security at the Crossroads: Toward Effective Pension
Reform in Latin America"
MILKO MATIJASCIC
Centro Universitário Salesiano São Paulo (UNISAL)
STEPHEN J. KAY
Federal Reserve Bank of Atlanta
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"Political Risk versus Market Risk in Social Security"
NBER Working Paper No. W12135
Contact: JOHN B. SHOVEN
Stanford University - Department of
Economics, National Bureau of Economic Research
(NBER)
Email: shoven@stanford.edu
Auth-Page: http://ssrn.com/author=15712
Co-Author: SITA N. SLAVOV
Occidental College - Department of
Economics
Email: sslavov@oxy.edu
Auth-Page: http://ssrn.com/author=512659
Full Text: http://ssrn.com/abstract=896208
ABSTRACT: Pay-as-you-go Social Security is typically
characterized as a universal defined benefit pension program.
Implicit in this characterization is a sense that the
participant's investment in future benefits is somehow
guaranteed, or safe from risk. This study develops the concept of
"political risk" as the possibility that some future legislature
will be forced to change the tax and benefit provisions of
pay-as-you-go social security programs, when there are changes in
the demographic and macroeconomic variables that support it. Thus
there is a "political risk" to participants that might be
compared to the "market risk" in a personal accounts retirement
scheme. In this paper, we carry out a detailed quantitative
analysis of political risk in the U.S. Social Security system, as
well as an overview of policy reforms in several European
countries that demonstrate political risk more broadly across
social security systems. For the U.S., we compute the internal
rates of return (IRRs) from Social Security for various age
groups and income levels, using the existing law in effect each
year since 1939. We find considerable variation in IRRs through
time for any birth cohort. Participants experienced significant
declines in IRRs as a result of adjustments made to restore the
system's solvency in 1983 and 1994. If the system were brought
into actuarial balance in 2005, younger cohorts would experience
another significant decline in their lifetime IRR. Our review of
other countries demonstrates political risk in other social
security systems as well. Law changes - necessitated by actuarial
imbalances - pass demographic risk on to participants. The debate
over personal accounts, therefore, is not one of "safe" versus
"risky" benefits, but one of portfolio choice.
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"Public Policy and the Transition to Private Pension Provision
in the United States and Europe"
Author: ONORATO CASTELLINO
University of Turin - Faculty of
Economics
Email: castellino@econ.unito.it
Auth-Page: http://ssrn.com/author=72398
Contact: ELSA FORNERO
University of Turin - Department of
Economics, Center for Research on Pensions and
Welfare Policies (CeRP)
Email: elsa.fornero@unito.it
Auth-Page: http://ssrn.com/author=277268
Full Text: http://ssrn.com/abstract=902352
ABSTRACT: PAYG and funding may and do coexist in social security
systems. The proportions of this coexistence, however, are quite
variable from country to country. The paper examines the US and a
number of European countries, looking at both the present state
and the foreseeable trends in future decades. The impact of a
mixed system is analysed under the relevant viewpoints, with
special reference to the adequacy and sustainability of the
overall structure and to the distribution of risk.
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"The Role of Earnings and Financial Risk in Distributional
Analyses of Social Security Reform Measures"
Contact: THOMAS L. HUNGERFORD
Congressional Research Service
Email: thunger@starpower.net
Auth-Page: http://ssrn.com/author=491573
Full Text: http://ssrn.com/abstract=800888
ABSTRACT: The Social Security Trustees project that the Social
Security program faces long-term financing difficulties. Several
proposals offered to shore-up the finances of the Social Security
program would create individual retirement accounts funded with
part of the payroll tax. The authors of many of these proposals
claim that future beneficiaries will be better-off under their
new system than under the current system. This study examines the
consequences of differing earnings patterns and year-to-year
differences in asset returns have for Social Security retired
worker benefits in three Social Security reform proposals.
Incorporating both actual earnings histories and variation in
asset returns shows that none of the three individual account
plans can always deliver benefits that are higher than payable
current law benefits.
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"Reforming Public Pensions in the US and the UK"
The Economic Journal, Vol. 116, pp. F94-F118, February
2006
Contact: PETER A. DIAMOND
Massachusetts Institute of Technology
(MIT) - Department of Economics, National Bureau of
Economic Research (NBER)
Email: pdiamond@mit.edu
Auth-Page: http://ssrn.com/author=21496
Full Text: http://ssrn.com/abstract=882163
ABSTRACT: This essay describes the current debate on reforming
Social Security in the US, along with a brief description of how
the program works. Along the way it comments on the quality of
some reform proposals as well as their political standing. Where
issues are similar, some inferences are drawn for the UK. While
the focus of this essay is the political debate, the debate and
my analysis do draw on the academic literature, which is not
surprising since academics have played a number of roles in the
debate, making reform proposals, being on and staffing the
commission appointed by President Bush, and working for the Bush
administration.
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"Changes in the OASI Benefit Distribution Under Various Social
Security Reform Alternatives"
EBRI Notes, Vol. 27, No. 4, April 2006
Contact: CRAIG COPELAND
Employee Benefit Research Institute
(EBRI)
Email: COPELAND@EBRI.ORG
Auth-Page: http://ssrn.com/author=255137
Full Text: http://ssrn.com/abstract=897754
ABSTRACT: This paper examines changes in the distribution of
Old-Age and Survivors Insurance (OASI) benefits (the primary
Social Security program) resulting from various widely discussed
Social Security reform alternatives. It focuses on five
alternatives: Current-law benefits; gradually reducing benefits;
increasing the normal retirement age; adopting progressive price
indexing, which would affect upper-income beneficiaries more than
lower-income ones; and a combination of raising the retirement
age and progressive price indexing. This analysis focuses on
Americans born in specific years (cohorts) whose OASI benefits
commence at age 62 or older and who have not received any other
Old-Age, Survivors and Disability Insurance (OASDI) benefits
before that age.
The PDF for the above title, published in the April 2006 issue of
EBRI Notes, also contains the full text of another April 2006
EBRI Notes article abstracted on SSRN: Tax Expenditures and
Employee Benefits: Estimates From the FY 2007 Budget.
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"Social Security: Reliance on Cash Flow Accounting and
Projections Disguises an Inherent Upside Cash Flow Bias"
Public Budgeting & Finance, Vol. 26, pp. 143-156, March
2006
Contact: DAVID MOSSO
Government of the United States of
America - Federal Accounting Standards Advisory
Board
Auth-Page: http://ssrn.com/author=367456
Full Text: http://ssrn.com/abstract=884300
ABSTRACT: The federal unified budget reports social security
program results on a cash flow basis. Policy is established
through projections of cash flows for 75 years into the future.
This paper discusses how reliance on cash flow accounting and
projections disguises an inherent upside cash flow bias that
makes the program's finances appear better than they actually are
and, when combined with the long-standing pay-as-you-go funding
policy, leads to periodic solvency crises. The paper does not
propose changing the budgetary accounting basis from cash to
accrual but does explore the possible application of accrual
accounting to the social security program for reporting purposes.
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"Social Security at the Crossroads: Toward Effective Pension
Reform in Latin America"
International Social Security Review, Vol. 59, No. 1,
pp. 3-26, January 2006
Contact: MILKO MATIJASCIC
Centro Universitário Salesiano São
Paulo (UNISAL)
Email: milko@uol.com.br
Auth-Page: http://ssrn.com/author=571889
Co-Author: STEPHEN J. KAY
Federal Reserve Bank of Atlanta
Email: stephen.kay@atl.frb.org
Auth-Page: http://ssrn.com/author=90267
Full Text: http://ssrn.com/abstract=875041
ABSTRACT: Individual pension savings accounts in Latin America
promised to improve compliance and raise benefits in a
cost-effective manner, while at the same time raising savings
rates, which would in turn promote economic growth. A review of
the evolution of pension reform in Latin America shows results to
have been mixed. Analyses of the recent reforms generally fail to
consider the extent to which the success or failure of pension
systems is driven by exogenous factors, including macroeconomic
and labour market conditions, and institutions. A number of
recent studies have issued a reassessment of the region's reforms
that stresses the importance of a basic guaranteed pension
benefit and recognizes that a range of alternatives are viable in
the region. Pension systems based on individual accounts are
undergoing a thorough reevaluation.