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THE WELFARE EFFECTS OF PAY-AS-YOU-GO RETIREMENT PROGRAMS: THE ROLE OF TAX AND BENEFIT TIMING

Authors

  • ALAN D. VIARD

    1. Viard: Resident Scholar, American Enterprise Institute, 1150 Seventeenth Street, N.W., Washington, DC 20036. Phone 202-419-5202, Fax 202-862-7177, E-mail aviard@aei.org
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      This work is related to a paper presented at the 2002 Western Economic Association International Conference, Seattle, June 30, 2002. The author is grateful for helpful comments by Jason L. Saving, John V. Duca, V. Brian Viard, seminar participants at the Federal Reserve Bank of Dallas, and an anonymous referee. This manuscript was written while the author was employed by the Federal Reserve Bank of Dallas.


Abstract

It is well known that pay-as-you-go retirement programs reduce steady-state welfare and the capital stock in dynamically efficient overlapping generation (OLG) economies. The common two-period OLG model obscures, however, the relationship between the magnitude of these effects and the ages at which taxes are paid and benefits received. Program changes that shift taxes to older workers or benefits to younger retirees have effects similar to reductions in program size, yielding steady-state welfare gains and increases in capital accumulation while imposing transition costs on current generations. This analysis has policy implications for both tax and benefit timing. (JEL H55, E62)

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