Figure 2, taken from Kotlikoff, Smetters, and Walliser (1998c), illustrates the A-К Model’s analysis the effects of social security’s privatization. If consider privatizing the U.S. system and financing the transition with a consumption tax. The figure’s top panel shows long-run increases of 40 percent and 15 percent in the economy’s capital stock and output, respectively. These gains are significant, but they aren’t enormous. Moreover, the half life of this policy is about 30 years.
The Figure’s bottom panel shows that the long-run gains are not free. They come at the price of lower u+ility to initial older and middle-aged generations. Interestingly, all those alive in the long-run, im s ding the richest (group 12) and poorest (group 1) agents, are better off. Since the system being privatized features a highly progressive benefit schedule, but also a highly regressive tax schedule, this finding shows that eliminating the regressive social security payroll tax is more important to the poor than losing the progressive benefit schedule.
Although Alan and I added demographics to a simplified version of the A-К Model, we are now collaborating with Smetters and Walliser to add demographics to the main A-К Model. The code redesign will be heavily influenced by my previous work on demographics with Alan. Formally, parents are assumed to have utility for (have a utility function defined over) their children’s consumption prior to age 21. Each agent gives birth to a specified number of children each year from age 21 through age 45. The numbers of these children are all fractions. When the children reach adulthood (age 21), they, in turn, start giving birth to children. The number of children being born to successive cohorts can be specified exogenously. By specifying a sharp rise and then a sharp decline in this number, one can produce a baby boom followed by a baby bust.
In the present version of the A-К Model, which incorporates intragenerational heterogeneity, adding demographics entails specifying separate birth rates for each earnings group within each cohort. In so doing, we’ll have a much richer demographic structure — one that permits different birth rates for the rich and the poor and also permits simulating different changes in birth rates over time for the rich and poor. Thus, for example, we’ll be able to simulate a baby bust among high earners and a baby boom among low earners. The present A-К Model also permits one to specify longer lifespans for successive cohorts, so we’ll also be able to consider how this factor will impact on the Social Security System. guaranteed payday loans direct lenders