Macroeconomic Consequences of Uncertain Social Security Reform

The U.S. social security system faces funding pressure due to the aging of the population. This dissertation examines the welfare cost of social security reform and social security policy uncertainty under rational expectations and under learning. I provide an overview of the U.S. social security sy...

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Main Author: Hunt, Erin
Other Authors: Evans, George
Language:en_US
Published: University of Oregon 2018
Subjects:
Online Access:http://hdl.handle.net/1794/23719
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spelling ndltd-uoregon.edu-oai-scholarsbank.uoregon.edu-1794-237192019-01-16T17:24:54Z Macroeconomic Consequences of Uncertain Social Security Reform Hunt, Erin Evans, George Bounded rationality Fiscal sustainability Learning Overlapping Generations Models Retirement savings Social security The U.S. social security system faces funding pressure due to the aging of the population. This dissertation examines the welfare cost of social security reform and social security policy uncertainty under rational expectations and under learning. I provide an overview of the U.S. social security system in Chapter I. In Chapter II, I construct an analytically tractable two-period OLG model with capital, social security, and endogenous government debt. I demonstrate the existence of steady states depends on social security parameters. I demonstrate a saddle-node bifurcation of steady states numerically, and demonstrate a transcritical bifurcation analytically. I show that if a proposed social security reform is large enough, or if the probability of reform is high enough, the economy will converge to a steady state. In Chapter III, I develop a three-period lifecycle model. The model is inherently forward looking, which allows for more interesting policy analysis. With three periods, the young worker's saving-consumption decision depends on her expectation of future capital. This forward looking allows analysis of multi-period uncertainty. Analysis in the three-period model suggests that policy uncertainty may have lasting consequences, even after reform is enacted. In Chapter IV, I develop two theories of bounded rationality called life-cycle horizon learning and finite horizon life-cycle learning. In both models, agents use adaptive expectations to forecast future aggregates, such as wages and interest rates. This adaptive learning feature introduces cyclical dynamics along a transition path, which magnify the welfare cost of changes in policy and policy uncertainty. I model policy uncertainty as a stochastic process in which reform takes place in one of two periods as either a benefit cut or a tax increase. I find the welfare cost of this policy uncertainty is less than 0.25% of period consumption in a standard, rational expectations framework. The welfare cost of policy uncertainty is larger in the learning models; the worst-off cohort in the life-cycle horizon learning model would be willing to give up 1.98% of period consumption to avoid policy uncertainty. 2018-09-06T21:54:27Z 2018-09-06T21:54:27Z 2018-09-06 Electronic Thesis or Dissertation http://hdl.handle.net/1794/23719 en_US All Rights Reserved. University of Oregon
collection NDLTD
language en_US
sources NDLTD
topic Bounded rationality
Fiscal sustainability
Learning
Overlapping Generations Models
Retirement savings
Social security
spellingShingle Bounded rationality
Fiscal sustainability
Learning
Overlapping Generations Models
Retirement savings
Social security
Hunt, Erin
Macroeconomic Consequences of Uncertain Social Security Reform
description The U.S. social security system faces funding pressure due to the aging of the population. This dissertation examines the welfare cost of social security reform and social security policy uncertainty under rational expectations and under learning. I provide an overview of the U.S. social security system in Chapter I. In Chapter II, I construct an analytically tractable two-period OLG model with capital, social security, and endogenous government debt. I demonstrate the existence of steady states depends on social security parameters. I demonstrate a saddle-node bifurcation of steady states numerically, and demonstrate a transcritical bifurcation analytically. I show that if a proposed social security reform is large enough, or if the probability of reform is high enough, the economy will converge to a steady state. In Chapter III, I develop a three-period lifecycle model. The model is inherently forward looking, which allows for more interesting policy analysis. With three periods, the young worker's saving-consumption decision depends on her expectation of future capital. This forward looking allows analysis of multi-period uncertainty. Analysis in the three-period model suggests that policy uncertainty may have lasting consequences, even after reform is enacted. In Chapter IV, I develop two theories of bounded rationality called life-cycle horizon learning and finite horizon life-cycle learning. In both models, agents use adaptive expectations to forecast future aggregates, such as wages and interest rates. This adaptive learning feature introduces cyclical dynamics along a transition path, which magnify the welfare cost of changes in policy and policy uncertainty. I model policy uncertainty as a stochastic process in which reform takes place in one of two periods as either a benefit cut or a tax increase. I find the welfare cost of this policy uncertainty is less than 0.25% of period consumption in a standard, rational expectations framework. The welfare cost of policy uncertainty is larger in the learning models; the worst-off cohort in the life-cycle horizon learning model would be willing to give up 1.98% of period consumption to avoid policy uncertainty.
author2 Evans, George
author_facet Evans, George
Hunt, Erin
author Hunt, Erin
author_sort Hunt, Erin
title Macroeconomic Consequences of Uncertain Social Security Reform
title_short Macroeconomic Consequences of Uncertain Social Security Reform
title_full Macroeconomic Consequences of Uncertain Social Security Reform
title_fullStr Macroeconomic Consequences of Uncertain Social Security Reform
title_full_unstemmed Macroeconomic Consequences of Uncertain Social Security Reform
title_sort macroeconomic consequences of uncertain social security reform
publisher University of Oregon
publishDate 2018
url http://hdl.handle.net/1794/23719
work_keys_str_mv AT hunterin macroeconomicconsequencesofuncertainsocialsecurityreform
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