econ 208 marek kapicka lecture 8 social security
TRANSCRIPT
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Econ 208
Marek KapickaLecture 8
Social Security
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Roadmap
Government Expenditures A) Data on Govt Expenditures B) Changes in Gov’t Spending in a
frictionless world C) Changes in Gov’t Spending in a
world with frictions D) Social Security
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PAYG Young pay SS taxes t Old receive benefits b Balanced budged each period
PAYG introduced in period T
n
bt
NbtN
1
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PAYG for Consumers Who Are Old in Period T
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PAYG for Consumers Born in Period T and Later
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PAYG for Consumers Born in Period T and Later
Change in wealth depends on r and n
Better off if n>r Worse off if n<r
)1)(1(1
11
rn
rnb
r
yy
r
by
n
bywe
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Fully Funded Social Security
Essentially a mandated savings program where assets are acquired by the young, with these assets sold in retirement.
Either ineffective or decreases welfare
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Fully Funded Social Security When Mandated Retirement Saving Is Binding
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What’s missing in the model?Costs of Fully funded social security
Transition costs It is costly to move from PAYG to FF
Commitment Problems Government cannot commit not to pay to
those who haven’t saved. It may be optimal to have PAYG even if .
Moral Hazard Government cannot commit to help
out those who made risky investments and became unlucky
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What’s missing in the model?Costs of PAYG: Fertility declines
Social security tax rate Tau and total Fertility Rate TFR. Source: Boldrin, De Nardi, Jones 2005, “Fertility and Social Security”
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What’s missing in the model?Costs of PAYG
Distortions of savings Distortions of labor supply (If
distortionary SS taxes) hours work in any given year years worked (choice of retirement
age)
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US Social Security
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Social Security in the World
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US Social Security
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Where are we?
1. Introduction: A model with no Government
2. Government Policies1. The Effects of Government Spending2. Government Taxation and Government
Debt
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What To Read
Read Today:
DLS, Chapter 13.2,13.4 The Region, Minneapolis Fed: “European
Vacation”, on the web Next time:
The Washington Post:"Where does the Laffer curve bend? "
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Today
Government Taxation 1) The data 2) The effects on Labor Supply 3) The effects on Government
Revenue 4) The effects on GDP
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Data on US TaxationFederal Government Revenue
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Data on US TaxationAverage Marginal Income Taxes
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Taxation
Lump-Sum tax vs. Distortive tax Lump sum tax does not depend on
the actions of the consumer With distortive taxation, the
welfare theorems fail Competitive equilibrium is not Pareto
optimal
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Why Distortive Taxation? In reality, lump-sum tax is infeasible
Lump sum means everyone pays the same amount but some people have no wealth
If differences among people are taken into account then a distorting tax is the only possibility
What are the effects of a flat tax on Labor Supply? Government Revenue? GDP? Capital Accumulation?
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Where we are
Government Taxation 1) The data 2) The effects on Labor Supply 3) The effects on Government
Revenue 4) The effects on GDP
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2) The Effects on Labor SupplyAn Example
Utility of a household
Household problem:
1),(
1LCLCU
wLtCts
LC
)1( ..
1max
1
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2) The Effects on Labor Supply
Solution:
Labor Supply decreases in the tax rate
1)1(max
1LwLt
L
1
])1[( wtL
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The model and the data E. Prescott (2004). “Why Do Americans Work So Much More Than Europeans?
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U.S. vs. France
1990’s: French productivity higher, but labor
supply much lower GDP per person lower in France than
in the USA 1970’s:
French productivity lower, but labor supply slightly higher
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Ohanian, Raffo, Rogerson: A more comprehensive study
Compare all the OECD countries for 1956-2004 period
How much can we explain by taxes?
Look for alternative explanations as well.
Conclusion: Taxes are the most important factor behind changes in labor supply
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Ohanian, Raffo, Rogerson: The data
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Ohanian, Raffo, Rogerson: The Results
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Ohanian, Raffo, Rogerson: Other Factors
Compute a labor supply wedge:
Our model predicts that the wedge is equal to the tax rate. What if other factors, outside of the model, affect it as well?
Look at measure of employment protection, union density, unemployment benefit replacement rate, duration benefits
Δ𝑡=1 −𝑀𝑅𝑆𝑙 ,𝑐
𝑀 𝑃𝑁
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Ohanian, Raffo, Rogerson: Other Factors