The Center for Retirement Research at Boston College has released a new paper by Annika Sundén titled "The Swedish Pension System and the Economic Crisis." Here's the abstract: The steep drop in financial markets in 2008 coupled with the ongoing economic recession pose immediate challenges for some public pension systems, particularly those that rely partly on equity investments. In the case of Sweden, the crisis provides an initial 'stress test' for a major pension system reform implemented earlier this decade. The new system created by the reform was designed to be fiscally sustainable by including automatic adjustment mechanisms to maintain balance in response to short-term economic and financial fluctuations and long-term demographic changes. Last fall's plummeting stock market produced a decline in Sweden's pension reserve funds and triggered a first-time automatic reduction in the pension indexation scheduled to occur in 2010. In response, policymakers decided to spread out the required adjustment over a longer period. This brief is organized as follows. The first section describes how the Swedish pension system is designed to maintain fiscal stability. The second section documents trends in the system's financial status. The third section explores the potential impact of the economic crisis on pension benefits under the system's original rules. The fourth section describes the policy response. The final section concludes that even automatic adjustments may produce offsetting political considerations. Click here for the full paper.
Tuesday, December 8, 2009
New paper: “The Swedish Pension System and the Economic Crisis”
Monday, December 7, 2009
Chuck Blahous: Social Security deficits into 6th month
Over at e21, the Hudson Institute's Chuck Blahous points out that Social Security's cash deficits, which began in May, have now continued for six months. This makes the chances of a strong revival in program cash flows less likely. Data recently made public by the Social Security Administration confirm that in October, 2009, the program reached a grim milestone: six consecutive months of operating cash deficits. This is the first time Social Security has faced this situation over the entire time period, dating back through 1987, for which SSA posts the monthly data online. From May through October inclusive, Social Security's outgoing payments have exceeded incoming program revenue, generated mostly by the payroll tax (with a smaller amount coming in via the taxation of benefits). When a cash-deficit situation develops during a period that the program is still technically solvent, full benefits continue to be paid. The operational deficit is effectively made up with general revenues, putting additional strain on a sagging federal budget. The primary reason for the early arrival of Social Security's deficits is the recession, which is depressing payroll tax revenue. The drop in employment, and its corollary effect on payroll taxes, is coinciding with a long-anticipated surge in benefit claims as the Baby Boomers begin to hit the retirement rolls. These factors have combined to accelerate Social Security's financial difficulties relative to previous projections. You can track Social Security's month-to-month finances at SSA's website here.
New working paper: Using Inflation to Erode the U.S. Public Debt
The National Bureau of Economic Research released a new working paper, titled Using Inflation to Erode the U.S. Public Debt by Joshua Aizenman by Nancy Marion. Here's the abstract: As a share of GDP, the U.S. Federal debt held by the public exceeds 50 percent in FY2009, the highest debt ratio since 1955. Projections indicate the debt ratio may be in the 70-100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences -shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities. Given where things seem to be heading, this is pretty useful information.
Friday, December 4, 2009
Dean Baker’s “practical” solution to health reform…
In railing against an entitlements reform commission, Dean Baker writes: serious people would focus on fixing the country's health care system, but the Peterson crew focuses on cutting Medicare. One obvious way to both cut Medicare costs and start to get U.S. health care costs under control would be to allow beneficiaries to buy into more efficient foreign health care systems, but the Peterson crew doesn't seem interested in proposals that don't cut benefits for working people. Okayyyy… Look, Dean's argument that people would be better off under foreign health care plans is a good one – I'm not one who hides behind the "America has the best health care system in the world" talking point. (Best quality? Probably – when you throw massive amounts of money at a problem it's hard not to get something back in exchange. But best quality for the price? I'm not at all sure about that.) But does Dean really think we'll get very far asking the Canadians, Brits, etc. to take over our health coverage? Leaving aside travel costs and adverse selection, those systems have problems of their own and I doubt they're looking to solve ours. But if Dean thinks this is the way to go maybe he should contact their embassies and see what they think.
Video from recent AEI conference, "Keeping Granny On the Job."
I've managed to embed video of the recent AEI event at which Estelle James and I discussed incentives to delay retirement in the U.S. and Chile. Take a look.
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Upcoming event: Demystifying the Deficit, Social Security Finances, & Commissions
This sounds interesting, though given a less-than-fully-rounded panel I get the feeling that tax cuts will get more blame for future deficits than they deserve – click here for my take on that question. Demystifying the Deficit, Social Security Finances, & Commissions December 11, 2009 10:00 AM–11:30 AM Event Information Location Capitol Visitor Center, Senate side, Room 209/208; see below for details Registration Deadline 12/09/2009 Contact ...Social Security & the budget: ...Commissions: Speakers include: ~ Refreshments will be served.~ LOCATION DETAILS: The Capitol Visitor Center, the new main entrance to the U.S. Capitol, is located on the East front at First Street and East Capitol Street, NE. This event is being held in SVC Room 209/208. To see a map, click here.
A briefing that will demystify...
...The general fund deficit:
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