Douglas H. Joines

A life cycle analysis of social security

SummaryWe develop an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it. Our setup consists of overlapping generations of 65-period lived individuals facing mortality risk and individual income risk. Private credit markets, including markets for private annuities, are closed by assumption. Unlike previous analyses, we find that an unfunded social security system may well enhance economic welfare. In our benchmark economy, the optimal social security replacement rate is 30%, and an empirically more plausible replacement rate of 60% raises welfare compared with an economy with no social security system.

Time-Inconsistent Preferences and Social Security

In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time-inconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employment status, retirement status, hours worked, and asset holdings. We consider two cases of time-inconsistent preferences. First, we model agents as quasi-hyperbolic discounters. They can be sophisticated and play a symmetric Nash game against their future selves; or they can be naive and believe that their future selves will exponentially discount. Second, we consider retrospective time inconsistency. We find that (1) there are substantial welfare costs to quasi-hyperbolic discounters of their time-inconsistent behavior, (2) social security is a poor substitute for a perfect commitment technology in maintaining old-age consumption, (3) there is little scope for social security in a world of quasi-hyperbolic discounters (with a short-term discount rate up to 15%), and, (4) the ex ante annual discount rate must be at least 10% greater than seems warranted ex post in order for a majority of individuals with retrospective time inconsistency to prefer a social security tax rate of 10% to no social security. Our findings question the effectiveness of unfunded social security in correcting for the undersaving resulting from time-inconsistent preferences.

Estimates of Effective Marginal Tax Rates on Factor Incomes

This chapter describes a method of calculating summary measures of effective factor income tax rates in the United States using readily available data. The numbers resulting from application of this method in a study are reported in the chapter, and some of their possible uses are discussed. The estimated factor income tax rates behave over time in a manner quite consistent with the behavior of other broad measures of federal tax policy. The postwar movement in the tax rate on income from labor relative to that on income from capital—or, more accurately, the relevant components of these tax rates—provides suggestive support for the Miller–Scholes hypothesis that the federal personal income tax has been moving in the direction of a pure consumption tax. The tax rates reported in the chapter are consistent with other studies that show a decrease since the 1950s in rates of taxation at the corporate level of income from corporate-held capital. They are also consistent with the view that rates of taxation of such income at the noncorporate level have risen but not quite sufficiently to offset the decline in the corporate tax burden.

THE SAVING RATE IN JAPAN: WHY IT HAS FALLEN AND WHY IT WILL REMAIN LOW

Japan is in the midst of a demographic transition that is larger and more rapid than other OECD countries. We are interested in understanding the role of lower fertility rates and aging for the evolution of Japans national saving rate. We use a computable general equilibrium model to analyze the response of the saving rate to changes in demographics and total factor productivity. In our model demographic factors account for 2-3 percentage points of the 9% decline in the saving rate between 1990 and 2000 and persistently depress the saving rate in future years. Copyright

Deficits and money growth in the United States 1872–1983☆

Abstract This paper reports empirical evidence on the relation between government budget deficits and the growth of high-powered money in the United States. High-powered money growth appears to be positively related to war spending during periods when such spending is a substantial fraction of GNP. There is little evidence that the growth of high-powered money is related to the non-war government deficit, measured either in cash or in real terms, after controlling for the level of overall economic activity.

The Implications of a Graying Japan for Government Policy

Japan is in the midst of a demographic transition that is both rapid and large by international standards. As recently as 1990, Japan had the youngest population among the Group of 6 large, developed countries. However, the combined effects of aging of the baby boomer generation and low fertility rates have produced very rapid aging. Japan now finds itself with the oldest population among the Group of 6, and its population will continue to age at a rapid pace in future years. Aging is already placing a burden on government finances, and Japans ability to confront the negative fiscal implications of future aging is constrained by its very high debt-to-GDP ratio. We find that Japan faces a severe fiscal crisis if remedial action is not undertaken soon, and we analyze alternative strategies for correcting Japans fiscal imbalances.

Saving and Interest Rates in Japan: Why They Have Fallen and Why They Will Remain Low

This paper quantifies the role of alternative shocks in accounting for the recent declines in Japanese saving rates and interest rates and provides some projections about their future course. We consider three distinct sources of variation in saving rates and real interest rates: changes in fertility rates, changes in survival rates, and changes in technology. The empirical relevance of these factors is explored using a computable dynamic OLG model. We find that the combined effects of demographics and slower total factor productivity growth successfully explain both the levels and the magnitudes of the declines in the saving rate and the after-tax real interest rate during the 1990s. Model simulations indicate that the Japanese savings puzzle is over.

International currency substitution and the income velocity of money

Abstract This paper presents new empirical evidence on the degree to which international currency substitution destabilizes domestic money demand. It also provides an explanation of some apparent discrepancies among previous empirical studies of currency substitution. This explanation hinges on the distinction between the elasticity of currency substitution and the cross-elasticity of money demand. A large (small) value of one elasticity does not imply a large (small) value of the other. A large cross-elasticity is required for currency substitution to destabilize domestic money demand. The empirical evidence presented here is consistent with the view that these cross-elasticities are typically small.

AN EXPERIMENTAL STUDY OF JOB EVALUATION AND COMPARABLE WORTH

The doctrine of comparable worth rests on an assumption that each job possesses an inherent worth independent of the market forces of supply and demand. Implementation of comparable worth further requires that inherent job worth be measured with reasonable accuracy. This paper reports the results of an experimental study of comparable worth. Three commercial job evaluation firms rated the same set of 27 jobs in an actual company. Statistical analysis of the experimental data indicates that the three evaluators differed in which job trait, or constellation of traits, they used to evaluate inherent job worth, implying that at least one of them failed to measure inherent job worth accurately. These results suggest that any attempt to implement comparable worth may be quite sensitive to the evaluator chosen to measure job worth.

Social security payments, money supply announcements, and interest rates

Abstract A monthly cycle existed in initially announced changes in seasonally adjusted M1 for a period extending at least from September 1977 to February 1984. This cycle was the source of systematic errors in the widely used Money Market Services forecast of M1. Such errors can induce a spurious relation between interest rates and expected changes in the money supply. When the survey forecasts are corrected to eliminate systematic errors, the apparent negative relation between interest rates and expected money supply changes disappears. Interest rates were not systematically related to either anticipated or unanticipated money supply changes during the period February 1984 to December 1986.