Intergenerational Risk Sharing and the Effects of Social Security Reforms

1. Intergenerational Risk Sharing and the Effects of Social Security Reforms Lee Lockwood Northwestern University & NBER and Day Manoli UT-Austin & NBER Joint Conference of the Retirement Research Consortium August 2-3, 2012, Washington, D.C.

2. Do household transfers respond to public pension reforms? • Many public pension programs face shortfalls • Importance • Distributional consequences • Effects of pensions on saving • Intergenerational links and informal risk-sharing

3. This paper • Analyze consumption and transfers in Italy in early 1990s • Pension and tax reforms and recession reduced the wealth of younger cohorts relative to older ones • Estimate combined effect of many factors

4. Relation to literature • Literature focuses on households directly affected by reforms • E.g., Attanasio and Brugiavini 2003 • Our main interest is indirect effects • Major challenge: confounding factors

5. Italy in 1992-1993 • Major reform of public pension program • Pension expenditures  15% of GDP • Reform cut 1/4 of liabilities • Other major reforms • Currency crisis and major recession

6. Analysis • Estimate effects of reforms and recession on income and consumption of different cohorts • Use regressions to construct counterfactual outcomes post-1992 • Compare counterfactual outcomes to actual outcomes to measure shocks, risk sharing • Estimate effects on transfers

7. Income

8. Income

9. Income shortfall (predicted – actual)

10. Consumption • Didincome shortfalls translate directly into consumption?

11. Consumption

12. Consumption shortfall(predicted – actual)

13. Summary: Income & Consumption • Risk-sharing very incomplete • Working-age cohorts: large consumption shortfalls • Retirement-age cohorts: little if any shortfall

14. Risk-sharing mechanisms • Co-residence / household size • Transfers

15. Household size

16. Transfers: “other income”

17. Conclusion • Little evidence of intergenerational risk-sharing • Further research needed to address confounding factors and mechanisms

18. Income

19. Consumption