Event Report  Global Economy

CIGS Seminar:"Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals" by Prof. Imrohoroglu

May 30, 2014, 15:00 - 17:00
Venue: CIGS Meeting Room 3

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Presentation by Prof. Imrohoroglu(PDF:415KB)

Seminar's outline
Title: "Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals"
Speaker: Prof. Selahattin Imrohoroglu (International Senior Fellow, CIGS / Academic Director and Assistant Dean, IBEAR MBA Program, Marshall School of Business, University of Southern California)
Moderator: Dr. Keiichiro Kobayashi, Research Director, CIGS

Outline of the speech

The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds presents estimates of actuarial balance of OASDI over the infinite-horizon under various assumptions on demographics, program parameters, and future ex-ogenous economic outcomes. Under their intermediate assumptions, "... Making Social Security solvent over the infinite horizon requires some combination of increased revenue or reduced benefits for current and future participants amounting to $23.1 trillion in present value, 4.0 percent of future taxable payroll, or 1.4 percent of future GDP."

There are alternative policy changes proposed within the policy circles. In particular, increasing the maximum taxable income in order to capture 90% of taxable earnings has been widely discussed as a policy change to help with actuarial balance. The Trustees' report and the calls for raising the taxable maximum are based on calculations that rule out any behavioral response from the individuals, households and firms. However, even in the absence of changes in policy, the aging of the population is likely to bring about changes in the composition of asset holdings and the distribution of hours worked over the life cycle, in addition to changes to the labor force participation rate. These changes in turn will have effects on wages and returns to capital and therefore influence the consumption, saving, participation, hours worked, and benefit claiming behavior of households. With policy changes that are sure to come, economic behavior will be even more impacted.

In this paper, we build a quantitative general equilibrium model populated with overlapping generations of individuals who face uninsurable wage risks, mortality risks and borrowing constraints under incomplete markets. Our immediate and primary goal is to assess the impact of the aging of the population and the various proposals to bring actuarial balance to social security. In particular, we will document (i) the effects on the timing of benefit claiming and labor force participation, (ii) the overall macroeconomic effects with likely changes in retirees' consumption and wealth accumulation, (iii) the welfare effects on individuals from different age, cohort, income and wealth categories, and (iv) how future developments in unemployment and disability insurance take up rates interact with retirement and labor force participation under the projected aging of the U.S. Social Security Area population.