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Our current social security system operates on a pay-as-you-go basis; benefits are paid almost entirely out of current revenues. As the ratio of retirees to taxpayers increases, concern about the high costs of providing benefits in a pay-as-you-go system has led economists to explore other options. One involves "prefunding," in which a person's withholdings are invested in financial instruments, such as stocks and bonds, the eventual returns from which would fund his or her retirement. The risks such a system would introduce--such as the volatility in the market prices of investment assets--are the focus of this offering from the NBER. Exploring the issues involved in measuring risk and developing models to reflect the risks of various investment-based systems, economists evaluate the magnitude of the risks that both retirees and taxpayers would assume. The insights that emerge show that the risk is actually moderate relative to the improved return, as well as being balanced by the ability of an investment-based system to adapt to differences in individual preferences and conditions.

Studies in the Economics of Aging is the fourth book in a series from the National Bureau of Economic Research that addresses economic issues of aging and retirement. Building on the research in The Economics of Aging (1989), Issues in the Economics of Aging (1990), and Topics in the Economics of Aging (1992), this volume examines issues related to population aging and the health and well-being of the elderly. Chapters cover population aging and government spending, life expectancy and health, saving for retirement and the role of 401(k) plans, demographic transition and housing values, aging in Germany and Taiwan, and the utilization of nursing homes and other long-term care. Economists, policymakers, and professionals in gerontology will find this book a useful reference for understanding the demographic and economic trends that affect the elderly.

Social Security Programs and Retirement around the World: Micro-Estimation represents the second stage of an ongoing research project studying the relationship between social security and labor supply. In the first volume, Jonathan Gruber and David A. Wise revealed enormous disincentives to continued work at older ages in developed countries. Provisions in many social security programs were shown to encourage retirement by reducing total compensation for work, thereby inducing older employees to leave the labor force early, magnifying the financial burden caused by population aging. At a certain age there simply is little financial benefit to continued work in many countries. In this volume, Jonathan Gruber and David A. Wise turn to a country-by-country analysis of retirement behavior based on micro-data. The result of research compiled by teams in twelve countries, the papers in this volume show a strong relationship between levels of social security incentives and retirement behavior in each country. Further, the estimates show that the effect is strikingly uniform in countries with very different cultural histories, labor market institutions, and other social characteristics. The key advantage of the micro-estimation approach of this volume is that in each country the effects on retirement of changes in social security provisions can be predicted. To demonstrate the effects of such changes, each of the papers here includes simulations of the effects of two illustrative reforms. One illustrative reform delays the benefit eligibility ages in each of the countries. A second illustrative reform assumes common provisions in each of the countries-reducing retirement incentives in some countries and increasing incentives in others. Utilizing the best methods, the conclusions to be drawn from Social Security Programs and Retirement around the World: Micro-Estimation will provide economists with the freshest and most provoking research yet in the ongoing debate regarding social security.

In the increasingly global economy, domestic tax policies have taken on a new importance for international economics. This unique volume compares the tax reform experiences of Canada and the United States, two countries with the world's largest bilateral flow of trade and investment. With the signing of the U.S.-Canada Free Trade Agreement and the tax reforms of the 1980s, there has been some harmonization of tax systems. But geographic, cultural, and political characteristics shape distinct national social policies that may impede harmonization. As the U.S. and Canadian economies become even more integrated, differences in tax systems will have important effects, in particular on the relative rates of economic growth. Scholars from both countries examine the extent to which conformity between these national programs has taken place, focusing on tax reforms of the 1980s, and assess the effects over the long term. The authors carefully consider the policy environment in which social programs are established and implemented, including such aspects as property rights, incentive structures, the degree and kind of economic freedoms, and the systems of private and public decision making. By comparing these environments, the authors show that certain aspects of the tax systems of Canada and the United States are converging, while in other respects they are diverging. For instance, both countries exhibit similar corporate tax structures and income tax systems, but they have very different approaches to sales taxes and social security taxes. Another interesting conclusion from these investigations is that although tax policies differ, outcomes are often quite similar. For example, they generateroughly the same amounts of revenue, produce similar costs of capital, and produce comparable distributions of income. The methodology and results of this research will have significant implications for the analysis and development of trade policies among other nations, as well as for understanding domestic social policy in a global economy.

Social security is one of the largest and one of the most popular programs administered by the United States government. It is also under significant pressure to reform: given projected increases in both individual life expectancy and the sheer number of retirees, the current system faces the possibility of an eventual overload. Alternative proposals have emerged, ranging from reductions in future benefits to a rise in tax revenue to various forms of investment-based personal retirement accounts. As this volume suggests, the distributional consequences of these proposals are substantially different, and may disproportionately affect those groups who depend on social security to avoid poverty in old age. Together, these studies persuasively demonstrate that appropriately designed investment-based social-security reforms could effectively reduce the long-term burden of an aging society on future taxpayers, increase the expected future income of retirees, and mitigate poverty rates among the elderly.

As the global economy continues to evolve, events such as the unification of European markets have prompted economists and policymakers to consider whether the current system of taxing income is inconsistent with the trend toward liberalized world financial flows and increased international competition. To help assess the effectiveness of existing tax policies and incentives, this volume presents new research on how taxes affect the investment and financing decisions of multinationals today. The authors examine international financial management, business investment, and international income shifting. The first three papers focus on financial management. Chapter 1 analyzes how tax and non-tax factors affect the relative importance of portfolio equity investments versus foreign direct investments and finds that the composition of equity flows differs dramatically according to tax differences. The authors of the second chapter look at the impact of U.S. and Canadian tax reforms on the financing of U.S. multinationals operating in Canada. Chapter 3 uses new data from 1986 corporate income tax returns to examine the effects of taxes on decisions by foreign subsidiaries to repatriate dividends to U.S. parent corporations. The next three chapters address international business investment. The authors of Chapter 4 consider why most models fail to show how tax policy affects foreign direct investment, and they offer improved models. Chapter 5 models U.S. tax incentives for the level and location of R&D performed by multinationals, and reveals that changes in the after-tax price of R&D have a significant effect on spending decisions of U.S. multinationals. Chapter 6 offers descriptive evidencefrom a careful field study of location and sourcing decisions in nine U.S. multinational manufacturing corporations. The final two papers examine income shifting. In chapter 7, the authors consider the fact that foreign-controlled companies in the United States pay lower taxes than do domestically-controlled companies. Unlike other studies, this one uses firm-level data files, including the actual tax returns filed by foreign-controlled companies. The eighth paper quantitatively assesses the importance of income shifting of U.S. multinationals, using Compustat data for 1984 through 1988 as well as information from annual reports. This volume will guide the development of new theoretical models in public finance and international economics, as well as inform the ongoing policy debate about reforming the taxation of multinational businesses in the United States and abroad.

The twentieth century saw significant increases in both life expectancy and retirement rates-changes that have had dramatic impacts on nearly every aspect of society and the economy. Forecasting future trends in health and retirement rates, as we must do now, requires investigation of such long-term trends and their causes. To that end, this book draws on new data-an extensive longitudinal survey of Union Army veterans born between 1820 and 1850-to examine the factors that affected health and labor force participation in nineteenth-century America. Contributors consider the impacts of a variety of conditions-including social class, wealth, occupation, family, and community-on the morbidity and mortality of the group. The papers investigate and address a number of special topics, including the influence of previous exposure to infectious disease, migration, and community factors such as lead in water mains. They also analyze the roles of income, health, and social class in retirement decisions, paying particular attention to the social context of disability. Economists and historians who specialize in demography or labor, as well as those who study public health, will welcome the unique contributions offered by this book, which offers a clearer view than ever before of the workings and complexities of life, death, and labor during the nineteenth century.

In the late 1990s, economic and financial crises raged through East Asia, devastating economies that had previously been considered among the strongest in the developing world. The crises eventually spread to Russia, Turkey, and Latin America, and impacted the economies of many industrialized nations as well. In today's increasingly interdependent world, finding ways to reduce the risk of future crises--and to improve the management of crises when they occur--has become an international policy challenge of paramount importance. This book rises to that challenge, presenting accessible papers and commentaries on the topic not only from leading academic economists, but also from high-ranking government officials (in both industrial and developing nations), senior policymakers at international institutions, and major financial investors. Six non-technical papers, each written by a specialist in the topic, provide essential economic background, introducing sections on exchange rate regimes, financial policies, industrial country policies, IMF stabilization policies, IMF structural programs, and creditor relations. Next, personal statements from the major players give firsthand accounts of what really went on behind the scenes during the crises, giving us a rare glimpse into how international economic policy decisions are actually made. Finally, wide-ranging discussions and debates sparked by these papers and statements are summarized at the end of each section. The result is an indispensable overview of the key issues at work in these crises, written by the people who move markets and reshape economies, and accessible to not just economists and policymakers, but also to educated general readers. Contributors: Montek S. Ahluwalia, Domingo F. Cavallo, William R. Cline, Andrew Crockett, Michael P. Dooley, Sebastian Edwards, Stanley Fischer, Arminio Fraga, Jeffrey Frankel, Jacob Frenkel, Timothy F. Geithner, Morris Goldstein, Paul Keating, Mervyn King, Anne O. Krueger, Roberto Mendoza, Frederic S. Mishkin, Guillermo Ortiz, Yung Chul Park, Nouriel Roubini, Robert Rubin, Jeffrey Sachs, Ammar Siamwalla, George Soros

In 1986, the National Bureau of Economic Research initiated a research project on the economics of aging under the direction of David A. Wise. The goal of the program is to further our understanding of both the determinants of the economic well-being and health of the elderly, and the consequences for the elderly and for the larger society of an increasingly older population. This third volume to result from the project contains nine essays addressing new issues, some of international scope, as well as research that continues work introduced in the previous volumes. Topics include retirement and saving for retirement; living arrangements and family support of the elderly; the aged in developing countries, including Thailand and Cote d'Ivoire; social security reform, with an analysis of the Japanese system; and the relation between the duration of nursing home stays and the source of payment for care. Each paper is accompanied by critical commentary. Robin L. Lumsdaine, James H. Stock, and David A. Wise find that although complex models are better predictors of actual retirement behavior, the most complex does not provide significantly more information. In a paper offering startling evidence likely to be of wide interest, Thomas E. MaCurdy and John B. Shoven report that the long-term rate of return on stocks is higher than that on bonds but, despite this difference in returns, fewer than twenty percent of TIAA-CREF participants choose to put more than half their retirement savings into stocks. Axel Borsch-Supan, Vassilis Hajivassiliou, Laurence J. Kotlikoff, and John N. Morris develop a model of living arrangements that promises easier implementation than past models, and confirm thatincreasing age and decreasing functional ability are the most important factors influencing the decision to enter a nursing home. Borsch-Supan, Jagadeesh Gokhale, Kotlikoff, and Morris consider the time that children spend with their parents, concluding that this time is determined primarily by demographic factors, with economic factors such as income and wealth playing an insignificant role. Using data from the Retirement History Survey, Michael D. Hurd argues that wealth, excluding housing, declines about three percent a year during retirement; average consumption expenditures also decrease by two to four percent a year, findings consistent with the life-cycle theory. Angus Deaton and Christina H. Paxson consider aging issues in less developed countries, finding that older people in Thailand and Cote d'Ivoire tend to live with younger relatives in multigenerational households and that economic status is less variable over the life cycle in these countries. The pay-as-you-go Japanese social security system is examined by Tatsuo Hatta and Noriyoshi Oguchi, as are the implications of changing from the current system to one that is actuarially fair. Alan M. Garber and Thomas E. MaCurdy explore the relation between the duration of nursing home stays and the source of payment for nursing home care. They conclude that the incentive effects of the subsidies of nursing home care may play an important role in what type of nursing home care is most often used. Finally, transitions in and out of nursing homes are considered by Edward C. Norton, who analyzes data from an experiment that tested the effects of performance-based reimbursement on the quality and cost of nursing home care.