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Econ 208

Econ 208. Marek Kapicka Lecture 8 Social Security. 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. PAYG. Young pay SS taxes t

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Econ 208

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  1. Econ 208 MarekKapicka Lecture 8 Social Security

  2. 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

  3. PAYG • Young pay SS taxes t • Old receive benefits b • Balanced budged each period • PAYG introduced in period T

  4. PAYG for Consumers Who Are Old in Period T

  5. PAYG for Consumers Born in Period T and Later

  6. PAYG for Consumers Born in Period T and Later • Change in wealth depends on r and n • Better off if n>r • Worse offif n<r

  7. 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

  8. Fully Funded Social Security When Mandated Retirement Saving Is Binding

  9. 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

  10. 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”

  11. 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)

  12. US Social Security

  13. Social Security in the World

  14. US Social Security

  15. Where are we? • Introduction: A model with no Government • Government Policies • The Effects of Government Spending • Government Taxation and Government Debt

  16. 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? "

  17. Today • Government Taxation • 1) The data • 2) The effects on Labor Supply • 3) The effects on Government Revenue • 4) The effects on GDP

  18. Data on US TaxationFederal Government Revenue

  19. Data on US TaxationAverage Marginal Income Taxes

  20. 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

  21. 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?

  22. 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

  23. 2) The Effects on Labor SupplyAn Example • Utility of a household • Household problem:

  24. 2) The Effects on Labor Supply • Solution: • Labor Supply decreases in the tax rate

  25. The model and the data E. Prescott (2004). “Why Do Americans Work So Much More Than Europeans?

  26. 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

  27. 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

  28. Ohanian, Raffo, Rogerson: The data

  29. Ohanian, Raffo, Rogerson: The Results

  30. 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

  31. Ohanian, Raffo, Rogerson: Other Factors

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