Friday, May 25, 2012

New papers from the Social Science Research Network

"The Impact of Changes in Second Pension Pillars on Public Finances in Central and Eastern Europe"
CESifo Working Paper Series No. 3801

BALÁZS ÉGERT, Organization for Economic Co-Operation and Development (OECD), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), University of Paris 10 Nanterre - Department of Economics, William Davidson Institute

This paper studies the impact of recent changes in second pension pillars of three Central and Eastern European Countries on the deficit and implicit debt of their full pension systems. The paper seeks to answer the following questions: what is the impact on the sustainability of Poland’s pension system of the decrease in the pension contribution going to the second pension pillar from 7.3% to 2.3% in 2011; what are the implications of the recent changes on gross replacement rates; does the weakening of the Polish second pension system have a different impact on pension system sustainability than a similar move in a Hungarian-style pension system with a defined-benefit first pillar and how does Estonia’s temporary decrease in pension contributions compensated by temporarily higher future rates affect pension sustainability in that country. The simulation results show that in our baseline scenario the Polish move would permanently lower future pension-system debt, chiefly as a result of a cut in replacement rates. But using a combination of pessimistic assumptions including strong population ageing, low real wage growth and a high indexation of existing pension benefits, coupled with bringing in tax expenditures related to the third voluntary pension pillar and an increase in the share of minimum pensions leads to higher pension system deficits and eventually more public debt at a very long horizon. The simulations also suggest that the Hungarian pension reversal reduces deficit and debt only temporarily, mainly because of Hungary’s costly defined-benefit first pension pillar: the weakening of the second pillar is tantamount to swapping low current replacement rates (in the defined-contribution second pillar) against high future replacement rates in the defined-benefit first pension pillar. Finally, results show that the Estonian move will increase public debt only very moderately in the long run, even though this result is sensitive to the effective interest rate on public debt.

"How Does Social Security Claiming Respond to Incentives? Considering Husbands' and Wives' Benefits Separately"
FEDS Working Paper No. 2012-19

ALICE HENRIQUES, affiliation not provided to SSRN

A majority of women receive most of their Social Security benefits based upon their husbands' earnings history, but previous research has shown that husbands' benefit claiming is inconsistent with maximizing lifetime benefits for the couple. However, that research assumes husbands choose their claim age based on all Social Security incentives facing the household. I show that husbands' claiming behavior responds to the actuarial incentives built into their own retired worker benefit formula, but not to the incentives built into the spouse and survivor formulas that determine their wives' benefits. This failure to incorporate his spouses' incentives reduces wives' lifetime benefits. Variation in incentives comes from rule changes to the Social Security benefit calculation in addition to the age difference between spouses and the relative strength of the wife's labor force history. A variety of robustness checks looking at segments of the population predicted to be more responsive to incentives provide similar results to the main specification.

"Political-Economy of Pension Plans: Impact of Institutions, Gender, and Culture"

RAJ AGGARWAL, University of Akron - Department of Finance
JOHN W. GOODELL, University of Akron - Department of Finance, College of Business Administration

National pension systems are an important part of financial intermediation and worker welfare in most countries, but how and why do they differ internationally? Controlling for important political, economic and social institutions, we document that international differences in pension progressivity, or how pensions reflect lifetime earnings, are negatively related to masculinity, uncertainty avoidance, individualism, long-term orientation, employment rights, average pension levels, social trust and economic inequality. We also find that pension progressivity is positively related to the economic and societal role of women, the extent of Catholicism; as well as political voice and accountability. These results provide important insights for both public policy and MNC managers.

"The Sensitivity of Proposed Social Security Benefit Formula Changes to Lifetime Earnings Definitions"
Social Security Bulletin 72(2): 1-22

HILARY WALDRON, U.S. Social Security Administration

Several Social Security proposals have included benefit formula changes that apply to earners above a specified percentage of the combined male and female (unisex) lifetime earnings distribution. The unisex distribution is an average of two disparate groups with large lifetime differences in labor market participation. This study finds that if Social Security’s median unisex average indexed monthly earnings (AIME) amount is used to define an earnings threshold below which benefits will be held roughly unreduced, the percentage of fully insured men subject to benefit reductions (70 percent) exceeds the unisex estimate of the population subject to benefit reductions (50 percent) by 20 percentage points. If policymakers wish to adjust future benefits and focus benefit reductions on middle or high primary or full-time wage earners in a household, the male, rather than unisex, AIME would come closer to achieving such a goal.

"The Implications of Marital History Change on Women’s Eligibility for Social Security Wife and Widow Benefits, 1990–2009"
Social Security Bulletin 72(2): 23-38, 2012

HOWARD IAMS, U.S. Social Security Administration
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration

Social Security retirement benefits in the United States (US) reflect marital histories and lifetime earnings of current and former married couples. Focusing on the link between marital history and benefit eligibility, this article examines women’s marital patterns over the past two decades. Using the 1990 and 2009 Marital History Modules to the Census Bureau’s Survey of Income and Program Participation, descriptive/regression analysis reveals substantial changes in women’s marital patterns among baby boomers and generation Xers. Those changes have prompted a decline in qualifying marital histories for Social Security spouse and widow benefits. The findings also reveal substantial variation by race/ethnicity. Black women are significantly more likely to be potentially ineligible for a marriage-based benefit than white women, particularly in more recent cohorts. Hispanic women’s marriage-based eligibility is between that of black and white women. US-born Hispanic women had higher shares without a qualifying marital history compared with the foreign born.

"The Growth in Social Security Benefits Among the Retirement-Age Population from Increases in the Cap on Covered Earnings"
Social Security Bulletin 72(2): 49-61, 2012

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
NAHID TABATABAI, Dartmouth College - Department of Economics

Analysts have proposed raising the maximum level of earnings subject to the Social Security payroll tax (the “tax max”) to improve long-term Social Security Trust Fund solvency. This article investigates how raising the tax max leads to the “leakage” of portions of the additional revenue into higher benefit payments. Using Health and Retirement Study data matched to Social Security earnings records, we compare historical payroll tax payments and benefit amounts for Early Boomers (born 1948–1953) with tax and benefit simulations had they been subject to the tax max (adjusted for wage growth) faced by cohorts 12 and 24 years older. We find that 43.2 percent of the additional payroll tax revenue attributable to tax max increases affecting Early Boomers relative to taxes paid by the cohort 12 years older leaked into higher benefits. For Early Boomers relative to those 24 years older, we find 53.5 percent leakage.

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