Most Popular Books by Laurence J. KOTLIKOFF

Learn the secrets to maximizing your Social Security benefits and earn up to thousands of dollars more each year with expert advice that you can''t get anywhere else. Want to know how to navigate the forbidding maze of Social Security and emerge with the highest possible benefits? You could try reading all 2,728 rules of the Social Security system (and the thousands of explanations of these rules), but Kotlikoff, Moeller, and Solman explain Social Security benefits in an easy to understand and user-friendly style. What you don''t know can seriously hurt you: wrong decisions about which Social Security benefits to apply for cost some individual retirees tens of thousands of dollars in lost income every year. How many retirees or those nearing retirement know about such Social Security options as file and suspend (apply for benefits and then don''t take them)? Or start stop start (start benefits, stop them, then re-start them)? Or-just as important-when and how to use these techniques? Get What''s Yours covers the most frequent benefit scenarios faced by married retired couples, by divorced retirees, by widows and widowers, among others. It explains what to do if you''re a retired parent of dependent children, disabled, or an eligible beneficiary who continues to work, and how to plan wisely before retirement. It addresses the tax consequences of your choices, as well as the financial implications for other investments. Many personal finance books briefly address Social Security, but none offers the thorough, authoritative, yet conversational analysis found here. You''ve paid all your working life for these benefits. Now, get what''s yours.

AS URGENT AS EVER: Nonpartisan policy recommendations and personal strategies for protecting against skyrocketing tax rates, reduced benefits, high inflation, and ruined currency. “Lays out in easy-to-understand prose why Social Security and Medicare need a comprehensive overhaul.” —Los Angeles Times In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18% more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, we’ll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. But to solve a problem you must first understand it. Kotlikoff and Burns take us on a guided tour of our generational imbalance, first introducing us to the baby boomers and the “fiscal child abuse” that will double the taxes paid by the next generation. There’s also the “deficit delusion” of the under-reported national debt. None of this will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending. So, how can the United States avoid this demographic/fiscal collision? Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security and Medicare. Their proposals are simple, straightforward, and geared to attract support from both political parties. Kotlikoff and Burns also offer a “life jacket”—guidelines for individuals to protect their financial health and retirement. This paperback edition has been revised and updated and includes a new foreword by the authors.

How generational policy affects the sustainability of a government''s fiscal policy. In these eight 2002 Cairoli Lectures, presented at the Universidad Torcuato di Tella in Buenos Aires, Argentina, Laurence Kotlikoff shows how generational policy works, how it is measured, and how much it matters. Kotlikoff discusses the incidence and measurement of generational policy, the relationship of generational policy to monetary policy, and the vacuity of deficits, taxes, and transfer payments as economic measures of fiscal policy. Kotlikoff also illustrates generational policy''s general equilibrium effects with a dynamic life-cycle simulation model and reviews the empirical evidence testing intergenerational altruism and risk sharing. The lectures were delivered as Argentina faced a devastating depression triggered, in large part, by unsustainable generational policy. Throughout the book, Kotlikoff connects his messages about generational policy to the Argentine situation and the Argentine government''s policy mistakes.

This text by Alan Auerbach and Laurence Kotlikoff uses a single analytic framework--the two-period life-cycle model--to explore and connect each of the major issues in contemporary macroeconomics.

How America went bankrupt and how we can save ourselves—as a country and as individuals—from economic disaster. The United States is bankrupt, flat broke. Thanks to accounting that would make Enron blush, America''s insolvency goes far beyond what our leaders are disclosing. The United States is a fiscal basket case, in worse shape than the notoriously bailed-out countries of Greece, Ireland, and others. How did this happen? InThe Clash of Generations, experts Laurence Kotlikoff and Scott Burns document our six-decade, off-balance-sheet, unsustainable financing scheme. They explain how we have balanced our longer lives on the backs of our (relatively few) children. At the same time, we''ve been on a consumption spree, saving and investing less than nothing. And that''s not to mention the evisceration of the middle class and a financial system that has proven it can''t be trusted. Kotlikoff and Burns outline grassroots strategies for saving ourselves—and especially our children—from what could be a truly catastrophic financial collapse. Kotlikoff and Burns sounded the alarm in their widely acclaimedThe Coming Generational Storm, but politicians didn''t listen. Now the need for action is even more urgent. It''s up to us to demand radical reform of our tax system, our healthcare system, and our Social Security system, and to insist on better paths to investment return than those provided by Wall Street (mis)managers. Kotlikoff and Burns''s "Purple Plans" (so called because they will appeal to both Republicans and Democrats) have been endorsed by a who''s who of economists and offer a new way forward; and their revolutionary investment strategy for individuals replaces the idea of financial capital with "life decision capital." Of course, we won''t be doing all this just for ourselves. We need to fix America''s fiscal mess before our kids inherit it. https://www.youtube.com/watch?v=IMKw76lBn0k&feature=youtube_gdata_player

Rich or poor, young or old, high school or college grad, this book, written by economist Laurence J. Kotlikoff and syndicated financial columnist Scott Burns, can change your life for the better! If you follow the advice in this book, it will raise your living standard (possibly by a lot), improve your lifestyle, and help you spend ''til the end. And it will completely transform your financial thinking, turning every bit of conventional financial wisdom on its head. If this sounds like a revolution in financial planning, you got it. So do The New York Times, The Washington Post, The Wall Street Journal, USA Today, Time, Consumer Reports, and other top publications that have been featuring the authors'' economics-based "consumption smoothing" approach to financial planning. Spend ''Til the End substitutes economic wisdom for the "rules of dumb" that currently pass for financial advice. In the process it indicts the investment and financial-planning industry for giving most people saving and insurance targets that are much too high and then convincing them to invest in risky mutual funds and expensive insurance policies. The result is that most people are scrimping and saving during the years when they could be spending and enjoying their money -- and with no sure payoff. Easy to read, this book is packed with practical and often shocking advice on whether to work, how to pick a career, which job to take, where to live, what sort of house to buy, how much to save, when to retire, which kind of retirement account to use, whether to have kids, whether to divorce, when to take Social Security, how fast to spend down your assets in retirement, and how to invest.

Discover how the global financial plague is poised to return, and what can be done to stop it This is not your father''s financial system. Jimmy Stewart, the trustworthy, honest banker in the movie, It''s a Wonderful Life, is dead. And so is his small-town bank, Bailey Savings & Loan. Instead, we''re watching It''s a Horrible Mess with Wall Street (aka the Vegas Strip) playing ever larger craps with our economy and our tax dollars. This book, written by one of the world''s most respected economist, describes in lively, humorous, simple, but also deadly serious terms the big con underlying the big game?the web of interconnected financial, political, and regulatory malfeasance that culminated in financial meltdown and brought us to our economic knees. But it also proposes an amazingly simply solution?Limited Purpose Banking to make Wall Street safe for Main Street. This book, as well as the financial fix described within it, have received rave reviews from a veritable who''s who of policymakers and economics, plus five economics Nobel Laureates Written by a leading economist whose insights on this topic are unparalleled Outlines the first and only proposal to fundamentally fix our financial disaster for good Jimmy Stewart Is Dead will fundamentally change the way you think about the economy, financial markets, and the government.

This collection of essays, coauthored with other distinguished economists, offers new perspectives on saving, intergenerational economic ties, retirement planning, and the distribution of wealth. The book links life-cycle microeconomic behavior to important macroeconomic outcomes, including the roughly 50 percent postwar decline in America''s rate of saving and its increasing wealth inequality. The book traces these outcomes to the government''s five-decade-long policy of transferring, in the form of annuities, ever larger sums from young savers to old spenders. The book presents new theoretical and empirical analyses of altruism that rule out the possibility that private intergenerational transfers have offset those by the government.While rational life-cycle behavior can explain broad economic outcomes, the book also shows that a significant minority of households fail to make coherent life-cycle saving and insurance decisions. These mistakes are compounded by reliance on conventional financial planning tools, which the book compares with Economic Security Planner (ESPlanner), a new life-cycle financial planning software program. The application of ESPlanner to U.S. data indicates that most Americans approaching retirement age are saving at much lower rates than they should be, given potential major cuts in Social Security benefits.

For anyone with an interest in pensions—workers and employers, personnel directors, accountants, actuaries, lawyers, insurance agents, financial analysts, government officials, and social scientists—this book is required reading. Now, without the aid of a pension specialist, anyone can determine how their particular pension plan stacks up against the average. Using virtually all available government sources (including computerized data unavailable in print) and their own extensive surveys, the authors present a comprehensive description of the structural features and financial conditions of U.S. private, state, city, and municipal pension plans. The introductions to the hundreds of tables explain and highlight the information. The picture that emerges of the "typical" plan and its significant variations is crucial to all those with a financial stake in pensions. The reader can compare pension vesting, retirement, and benefit provisions by plan type, plan size, industry, union status, and many more characteristics. With this information, workers can evaluate just how generous their employer is; job applicants can compare fringe benefits of prospective employers; personnel directors can judge their competitive edge. The financial community will find especially interesting the analysis of the unfunded liabilities of private, state, and local pension funds. The investment decisions of private and public pension funds and their return performances are described as well. Government officials and social scientists will find the analysis of pension coverage, the receipt of pension income by the elderly, cost-of-living adjustments, and disability insurance of special importance in evaluating the proper degree of public intervention in the area of old age income support. Pensions in the American Economy is comprehensive and easy to use. Every reader, from small-business owners and civil servants to pension fund specialists, will find in it essential information about this increasingly important part of labor compensation and retirement finances.

Examines evidence which points to a deterioration in the standard of living of American children relative to adults, particularly the current elderly. With generational accounting, it compares the lifetime net tax burdens (taxes paid less transfers received) of different generations.

Locational choice is one of the fundamental exercises of consumer sovereignty. When regions (or localities within regions) specify different tax rates or supply different amounts of public goods, they distort individuals'' location choices. This paper models and measures for the U.S. and New England the location distortion arising from inter regional differences in taxation and supplies of public goods. In our overlapping generations model agents, at each point in their lifespan, choose where to locate taking into account their locational preferences, each region''s wage, consumption, and personal capital income taxes, and each region''s supply of public goods. The findings suggest that regional fiscal differences play an important role in the location choices of three to four percent of Americans. For these Americans the distortion of location choice is equivalent to roughly a half of a percent of their lifetime consumption. Across all Americans, however, the location distortion induced by U.S. regional fiscal differences is quite small, simply because the differences in tax rates and per capita levels of public goods expenditures across regions are not sufficiently large to induce most Americans to change location. Our analysis indicates, however, that location distortions are an increasing function of regional differences in tax rates and levels of public goods expenditure. Indeed, a doubling of the scale of public finances across all U.S. states would lead to roughly a quadrupling of the location distortion.

A simple, straightforward, and foolproof proposal for universal health insurance from a noted economist. The shocking statistic is that forty-seven million Americans have no health insurance. When uninsured Americans go to the emergency room for treatment, however, they do receive care, and a bill. Many hospitals now require uninsured patients to put their treatment on a credit card which can saddle a low-income household with unpayably high balances that can lead to personal bankruptcy. Why don''t these people just buy health insurance? Because the cost of coverage that doesn''t come through an employer is more than many low- and middle-income households make in a year. Meanwhile, rising healthcare costs for employees are driving many businesses under. As for government-supplied health care, ever higher costs and added benefits (for example, Part D, Medicare''s new prescription drug coverage) make both Medicare and Medicaid impossible to sustain fiscally; benefits grow faster than the national per-capita income. It''s obvious the system is broken. What can we do? In The Healthcare Fix, economist Laurence Kotlikoff proposes a simple, straightforward approach to the problem that would create one system that works for everyone and secure America''s fiscal and economic future. Kotlikoff''s proposed Medical Security System is not the "socialized medicine" so feared by Republicans and libertarians; it''s a plan for universal health insurance. Because everyone would be insured, it''s also a plan for universal healthcare. Participants—including all who are currently uninsured, all Medicaid and Medicare recipients, and all with private or employer-supplied insurance—would receive annual vouchers for health insurance, the amount of which would be based on their current medical condition. Insurance companies would willingly accept people with health problems because their vouchers would be higher. And the government could control costs by establishing the values of the vouchers so that benefit growth no longer outstrips growth of the nation''s per capita income. It''s a "single-payer" plan, but a single payer for insurance. The American healthcare industry would remain competitive, innovative, strong, and private. Kotlikoff''s plan is strong medicine for America''s healthcare crisis, but brilliant in its simplicity. Its provisions can fit on a postcard and Kotlikoff provides one, ready to be copied and mailed to your representative in Congress.

Since 1980, the U.S. net national saving rate has averaged less than half the rate observed in the 1950s and 60s. This paper develops a unique cohort data set to study the decline in U.S. national saving. It decomposes postwar changes in U.S. saving into those due to changes in cohort-specific consumption propensities, those due to changes in the intergenerational distribution of resources, those due to changes in government spending on goods and services, and those due to changes in demographics. Our findings are striking. The decline in U.S. saving can be traced to two factors: The redistribution of resources from young and unborn generations with low or zero propensities to consume toward older generations with high consumption propensities, and a significant increase in the consumption propensities of older Americans. Most of the redistribution to the elderly reflects the growth in Social Security, Medicare, and Medicaid benefits. The increase in the elderly''s consumption propensities may also reflect government policy, namely the fact that Social Security, Medicare, and Medicaid benefits are paid in the form of annuities and that, in the case of Medicare and Medicaid, the annuities are in-kind and must, therefore, be consumed.

"The developed word stands at the fore of a phenomenal demographic transition. Over the next 30 years the number of elderly in the U.S., the EU, and Japan will more than double. At the same time, the number of workers available to pay the elderly their government-guaranteed pension and health care benefits will rise by less than 10 percent. The fiscal implications of these two demographic trends are alarming. Paying promised benefits will, it appears, require a doubling or more of payroll tax rates. This paper asks if there is a silver lining in this dark cloud hanging over the developed world. Specifically, can the developed economies hope to be bailed out by either macroeconomic feedback effects of by increased migration? To address these questions, this paper develops and simulates a dynamic, intergeneration, and interregional demographic life-cycle model. The model has three regions the U.S. Japan which exchange goods and capital. The model features immigration, age-specific fertility, life span extension, life span uncertainty, bequests arising from incomplete annuitization, and intra-cohort heterogeneity. Other things equal, one would expect the aging of the developed economies to increase capital per worker as the number of suppliers of capital (the old) rises relative to the number of suppliers of labor (the young). But given the need to pay the elderly their benefits, other things are far from equal. According to our simulations, the tax hikes needed to finance benefits along the demographic transition path generate a major capital shortage that lowers real wages by 19 percent and raises real interest rates by over 400 basis points. Hence, far from mitigating the developed world''s fiscal problems, macroeconomic feedback effects make matters significantly worse. The simulations also show that increased immigration does very little to mitigate the fiscal stresses facing the developed world. On the other hand, there are policies that can materially improve the developed world''s long-term prospects. The one examined here is closing down, at the margin, existing government pension systems and using consumption taxes to pay off those program''s accrued liabilities. This policy could be coupled with the establishment of a fully funded mandatory individual saving system. According to our simulations, this policy would impose modest welfare losses on current generations, but generate enormous welfare gains for future generations. Future Europeans and Japanese benefit the most. Their net wages almost triple, and their welfare levels double compared with the no-reform scenario"--NBER website

What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members of particular households act selfishly and do not fully share resources with extended family members in other households. Hence, altering the distribution of resources across households within the extended family will alter the consumption and labor supply of those households who acquire or lose resources. In contrast to the Life Cycle and Keynesian models, the altruism model implies that the extended family is the basic economic decision-making unit. According to this model the extended family is linked through altruism and, as a result, acts as if it fully shares resources. In the altruism model nondistortionary changes in the distribution of resources across households within the extended family will have no effect on the consumption or labor supply of any of its members. Despite its importance, the boundaries of economic decision-making units have not, to our knowledge, been examined directly with micro data. Stated differently, the altruism model has not been tested against the Life Cycle and Keynesian alternatives with such data. This paper uses matched data on parents and their adult children, contained in the Panel Study of Income Dynamics, to perform such a test. In essence our test asks whether the distribution of consumption and labor supply across households within the extended family depends on the distribution of resources across households within the extended family. Our findings provide quite strong evidence against the altruism model. The distribution of resources across households within the extended family is a highly significant (statistically and economically) determinant of the distribution of onsumption within the extended family. This finding holds for the entire sample as well as the subsample consisting of rich parents and poor children. In addition to showing that the distribution of extended family resources matters for extended family consumption, we test the life cycle model by asking whether only own resources matter, i.e., whether the resources of extended family members have no affect on a household''s consumption. Our results indicate that extended family member resources have, at most, a modest effect on household consumption after one has controlled for the fact that extended family resources help predict a household''s own permanent income.

The U.S. and other western economies are experiencing dramatic changes in growth and age structure of their populations. Fluctuations in birth rates are the most important determinants of these changes in the post war period. This paper examines the dynamic effects of baby "booms" and baby"busts" on a range of economic variables using a perfect foresight life cycle simulation model. In addition to describing general transition (as opposed to simply long run) affects of fertility change, the paper considers alter-native Social Security policies for avoiding sharp increases in long run payroll tax rates. These include reductions in benefit replacement rates, advances in Social Security''s retirement age, taxation of social security benefits, and the accumulation of a significant Social Security trust fund. According to the simulated demographic transitions, the savings inthe U.S. fertility currently underway can have very major impacts on long run factor returns and produce percipitous short term changes in saving rates. While Social Security policy has important effects on the simulated demographic transitions, these effects are of secondary importance to the long run level of economic welfare. Even if payroll tax rates rise dramatically, long run welfare (measured in terms of levels of adult consumption and leisure) is, nonetheless, substantially higher in the case of a sustained dropin the fertility rate. This reflects, in part, the decline in the number of dependent children per adult; while a sustained decline in the fertility rate eventually means a much larger ratio of elderly per capita, the decline in children per capita means an overall decline in the long run ratio of dependents to prime age workers in the economy. A second explanation for the simulated long run welfare gains is capital deepening associated with lower population growth rates

We consider four models of consumption that differ with respect to efficient risk-sharing and altruism. They range from complete markets with altruism to family risk-sharing. We use a matched sample of parents and independent children available from the Panel Study of Income Dynamics to discriminate between the four models. Our testing procedure is designed to deal with the set of observed independent children being endogenously selected. The combined hypothesis of complete markets and altruism can be decisively rejected, while we fail to reject altruism and hence family risk-sharing for a subset of families.

This paper compares two general methods of privatization social security: forced participation in the new privatized system vs. letting people choose between the new system or staying in social security (i.e., opting out). Simulations are performed using a large scale perfect-foresight OLG simulation model that incorporates both intra-generational and inter-generational heterogeneity. The decision of any agent to opt out is endogenous and depends on the opting out decisions of all other agents vis- ...-vis factor prices. Various tax bases are considered in financing the transition path, as well as the perceived tax-benefit linkage due to the informational problems inherent in many social security systems. We consider two cases: full and no perception Both methods of privatizing social security lead to large long- run gains for all lifetime income classes despite the intra-generational progressivity of social security, but differ in their short run effects due to adverse selection associated with opting out. Adverse selection is a key reason why many economists oppose opting out and why many plans to privatize social security systems mandate participation. This paper, however, shows this wisdom to be wide of the mark. Opting out is better at protecting the welfare of the initial elderly, even though forced participation protects their real value of social security benefits because opting out continues to collect payroll tax revenue from those who stay with social security. Opting out can mean quicker transition paths by reducing social security wealth faster than forced participation, because many will forfeit their accrued claims as the price of opting out. Yet opting out, along with a decrease in the payroll tax rate is better at shifting the burden to future workers who benefit from privatization.

We use the 1988 PSID to study the effects of income and wealth on transfers of money and time between individuals and their parents as well as the effects of incomes of other relatives on these flows. We relate the relative incomes of parents and parents in-law to transfer amounts given and received by married couples. We also study how the relative incomes of divorced parents influence transfers. We find that money transfers tend to reduce inequality in household incomes and that time transfers are only weakly related to income differences. Richer siblings give more to parents and receive less. Among parents and parents in-law the richer set of parents is more likely to give money and less likely to receive money. The same is true of divorced parents. In contrast to the implications of simple exchange models of transfers, there is little evidence in the cross section or in the analysis using siblings that parental income or wealth raises time transfers from children or that time transfers are exchanged for money transfers. In the cross section and among siblings, the strong negative relationship between time transfers and distance from parents is not associated with a strong negative relationship between distance and money transfers. We discuss the implications of our results for alternative models of transfers.

This paper examines whether middle age American households purchase adequate amounts of life insurance. The analysis is based on SRI International''s 1980, 1982, and 1984 surveys of the financial positions of American households. Our findings indicate that a significant minority of American wives are highly under-insured with respect to the possible deaths of their husbands. Under the assumption that actuarially fair annuities are available we find that just over 30 percent of wives are inadequately insured, by which we mean they would suffer a loss in their rate of sustainable consumption of at least 30 percent in the event of being widowed. If one assumes that annuities are not available the fraction of wives who are inadequately insured is 24 percent. These findings on inadequate life insurance are even more striking if one focuses on those households in which over half of the couple''s present expected value of resources is dependent on the husband''s survival. The fraction of wives in such households who are inadequately insured is 41 percent if one assumes fair annuities are available, and 31 percent if one assumes annuities are unavailable. The problem of inadequate insurance is even more significant among households of more modest means. Almost half of wives in such households who are in need of life insurance protection are inadequately insured, and this statement holds regardless of whether fair annuities are available. The results of this paper together with those of the related literature strongly suggest that raising the share of social security benefits that are paid to surviving spouses as well as increasing in employer-provided group life insurance could have a very considerable impact on the alleviation of poverty among widows, especially elderly widows.

The precautionary motive for saving is an important issue that is receiving increasing attention. Part of the motivation for this interest stems from the post war coincidence of two trends, one a decline in the U.S. rate of saving and the other an increase in insurance of various types, including unemployment insurance, annuity insurance, disability insurance, and health insurance. This paper examines precautionary saving for uncertain health care payments using a simple two period and illustrates this model''s theoretical insights through simulations of a 55 period life cycle model. While derived from a highly stylized model, the simulations give the impression that precautionary saving for uncertain health expenditures could explain a large amount of aggregate savings. Adding uncertain health expenditures to the model''s economy raises long run savings by almost one third, assuming individuals self insure. Arrangements for insuring uncertain health expenditures also have potentially quite sizable effects on savings. Introducing actuarially fair insurance to the economy with uncertain health expenditures reduces the steady state level of wealth of that economy by 12 percent. Switching from the fair insurance arrangement to a Medicaid-type program with an asset test further reduces steady state wealth by 75 percent.

Notwithstanding its widespread use as a measure of fiscal policy, the government deficit is not a well-defined concept from the perspective of neoclassical macro economics. From the neoclassical perspective the deficit is an arbitrary accounting construct whose value depends on how the government chooses to label its receipts and payments. This paper demonstrates the arbitrary nature of government deficits. The argument that the deficit is not well-defined is first framed in a simple certainty model with nondistortionary policies, and then in settings with uncertain policy, distortionary policy, and liquidity constraints. As an alternative to economically arbitrary deficits, the paper indicates that the "Fiscal Balance Rule" is one norm for measuring whether current policy will place a larger or smaller burden on future generations than it does on current generations. The Fiscal Balance Rule is based on the economy''s intertemporal budget constraint and appears to underlie actual attempts to run tight fiscal policy. It says take in net present value from each new young generation an amount equal to the flow of government consumption less interest on the difference between a) the value of the economy''s capital stock and b) the present value difference between the future consumption and future labor earnings of existing older generations. While the rule is a mouth-full, one can use existing data to check whether it is being obeyed and, therefore, whether future generations are likely to be treated better or worse than current generations

Decomposes the growth in healthcare expenditure in Australia, the UK and the US, and examines how much is due to demographic change and how much is due to increases in benefit levels.

This article examines how the availability of annuities affects savings and inequality in economies in which neither private nor public pensions initially exist. The absence of widespread market or government annuity insurance is clearly descriptive of many less developed countries in the world today; it was also a characteristic of virtually all countries prior to World War II. The paper compares economies with perfect insurance with economies in which completely selfish parents and children pool longevity risk to their mutual advantage. The analysis of the latter economies takes into account the infinite sequence of risk sharing bargains of successive parents with their children. Such bargains affect current risk sharing between parents and child because they determine the welfare of current children when they become parents. Calculations based on the CBS utility function indicate that perfecting annuity insurance can significantly reduce national savings. Indeed, the insurance aspects of government pensions are potentially as important as underfunding government pensions in reducing national savings.

Notwithstanding the rosy short-term fiscal scenarios being advanced in Washington, the demographic transition presents the United States with a very serious fiscal crisis. In 30 years there will be twice the number of elderly, but only 15 percent more workers to help pay Social Security and Medicare benefits. A realistic reading of the government demographic projections suggests a two thirds increase in payroll tax rates over the next three to five decades. However, these forecasts ignore macroeconomic feedback effects. In particular, they ignore the possibility that the nation will have more capital per worker as the number of elderly wealth-holders rises relative to the number of young workers. More capital per worker would mean higher worker productivity, higher real wages, and the lower return to capital that worries Wall Street. It would also mean a bigger payroll tax base and a smaller rise in tax rates. On the other hand, a higher payroll tax will leave workers with less after-tax income out of which to save and, therefore, fewer retirement assets than would otherwise be the case. Thus capital deepening is not a foregone conclusion. This study develops a dynamic general equilibrium life-cycle simulation model to study these conflicting forces. The model is the first of its kind to admit realistic patterns of fertility and lifespan extension. It also features heterogeneity, within as well as across generations, and, thus, can be used to study both intra- and intergenerational equity. Unfortunately, our baseline demographic simulation, which assumes the continuation of current social security policy, shows deteriorating macroeconomic conditions that will exacerbate, rather than mitigate, our fiscal problems. Real wages per effective unit of labor fall 4 percent over the next 30 years and 10 percent over the century. For Wall Street, this bad news about real wages is good news about the real return on capital, which rises 100 basis points by 2030 and 300 basis points by 2100. The model''s gradual capital shallowing reflects the concomitant major rise in tax rates. In 2030, payroll tax rates and average income-tax rates applied to wages are 77 and 9 percent higher, respectively, than in 2000. Together, these tax hikes raise.

Distingiishing "spot" versus "contract" views of the labor market is of critical importance to a host of economic issues ranging from wage flexibility over the business cycle to firm financial valuation. The structural features of U.S. private pension plans permit surprisingly strong inferences concerning the incentive effects of private pension plan provisions and the contractual nature of the U.S. labor market. This paper examines the accrual of vested pension benefits of a nation-wide sample of pension plans. We find strikingly larged is continuities in the profile by age of the ratio of annual accrued pension benefits to the standard wage. These discontinuities primarily occur at the ages of full vesting and early retirement. Representative plans often exhibit absolute changes in accrual ratios of 20 to 30 percentage points at these ages.The provisions of many plans imply large negative accruals after the age of early retirement. Job change typically involves a large loss in pension wealth as well. Since the average worker''s marginal product presumably changes smoothly as he or she ages, these pension data can only be reconciled with spotmarket clearing if age wage profiles within a firm exhibit exactly offsetting discontinuities at key ages. Casual inspection of firm wage setting behavior rules out this requirement of spot market clearing. In our view the magnitude,patterns, and variations in pension accrual ratios are strikingly at odds with spot market equilibrium. While market clearing in longer term contracts seems the only equilibrium theory consistent with these findings, it also strains our credulity to ascribe optimizing behavior to the pension accrual profiles chosen by a vast array of U.S. businesses. In the process of presenting these profiles we also consider the following questions concerning U.S. pensions. What are the incentive effects of private pension plans? What is the cost in pension benefits of job turnover? How important is vesting? Is there a cost in pension benefits of foregoing the early retirement option? Do pension stipulations encourage early retirement? While the considerable heterogeneity of pension plan provisions permits no simple or single answer to these questions, the data suggest that pensions can have major incentive effects on job turnover and retirement. In general pensions represent a very significant factor, and at certain ages, a dominant factor in employee compensation.

Our previous study (Auerbach, Gokhale and Kotlikoff 1991) introduced the concept of generational accounting, a method of determining how the burden of fiscal policy falls on different generations. it found that fiscal policy in the U.S. is out of balance, in terms of projected generational burdens. This means that either current generations will bear a larger share (than we project under current law) of the burden of the government''s spending or that future generations will have to pay, on average, at least 21 percent more, on a growth-adjusted basis, than will those generations who have just been born. These conclusions were based on relatively optimistic assumptions about the path of social security sod Medicare policies, namely that the accumulation of a social security trust fund would continue and that Medicare costs would not rise as a share of QP. In this paper, we simulate the effects of realistic alternative paths for social security and Medicare. Our results suggest that such alternative policies could greatly increase the imbalance in generational policy, making not only future generations pay significantly more, but current young Americans as well. For example, continued expansion of Medicare in this decade alone could double the 21 percent imbalance figure if the bill for this Medicare growth is shifted primarily to future generations.

This paper studies the macroeconomic and efficiency effects of privatizing social security. It does so by simulating alternative privatization schemes using the Auerbach-Kotlikoff Dynamic Life-Cycle Model. The simulations indicate three things. First, privatizing social security can generate very major long-run increases in output and living standards. Second the long-run gains from privatization are larger if privatization redistributes resources from initial to future generations, the pure efficiency gains from privatization are also substantial. Efficiency gains refers to the welfare improvement available to future generations after existing generations have been fully compensated for their losses from privatization. The precise size of the efficiency gain depends on the existing tax structure, the linkage between benefits and taxes under the existing social security system, and the method chosen to finance benefits during the transition. Third, at least in the long run, privatizing social security is likely to be progressive in that it improves the well-being of the lifetime poor relative to that of the lifetime rich.

In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests testing the neoclassical model by ascertaining whether new earnings information explains consumption choice through time. It also suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. This paper derives a fairly general theoretical relationship between properly defined innnovations in consumption (noise) and revisions in expectations of lifetime earnings (news). It also clarifies the relationship between testing for the theoretical determinants of consumption and standard Euler tests that focus on theoretical nondeterminants of consumption. The chief prediction of the paper''s theoretical results, that noise exactly equals news, is tested using aggregate time series data on consumption and earnings. We find that new earnings information explains only a very small fraction of the variance of aggregate consumption innovations. On the other hand, the extent of suboptimal consumption choice appears to be of little economic significance.

This paper compares the predictions of three different saving models with respect to the impact of projected U.S. demographic change on future U.S. saving rates. The three models are the life cycle model, the infinite horizon altruism model, and a reduced form econometric model. The findings for the different models indicate a great range of possible paths of future U.S. saving. However, the three models concur in predicting a peak in the U.S. national saving rate in the near future (within 15 years), followed by a significant decline in the saving rate thereafter. In fact, the findings suggest the strong possibility of negative U.S. saving rates beginning after 2030.

This article demonstrates that Ricardian Equivalence does not necessarily hold in models with altruistic transfers once one takes into account the strategic behavior of recipients as well as donors. To influence the final allocation of consumption in altruistic settings, potential recipients can threaten to refuse as well as accept transfers. We apply the Extended Nash Bargaining Solution to the problem of an altruistic parent and a possibly altruistic child. The parent and child first choose a threat point noncooperatively; this threat point then influences the final allocation of consumption through the standard Nash Bargaining Solution, While the potential recipient can refuse transfers from the potential donor, he cannot refuse transfers from the government. When the government redistributes between the parent and child, it changes their endowments and the equilibrium threats, and thus the final allocation of consumption. The feature of the cooperative model presented here that leads to the failure of Ricardian Equivalence may be characteristic of a wider class of cooperative and noncooperative altruism models. This feature is that noninterior strategic postures underlie interior transfer behavior and that these non- interior strategic postures are altered by government redistribution.

Proposes a new system of tracking who pays for today''s federal expenditures and tells how to assess the long-term impact of government fiscal decisions

This book examines a number of important determinants of wealth accumulation, including retirement bequests, and precautionary saving motives, demographics, the tax structure, social security, and insurance institutions.