Midterm Topic 10 Flashcards
three government outlays / spending
- government payments for goods and services
- government transfers to domestic households or firms without an exchange of goods and services
- interest as payments for government borrowing from private sector or foreign governments
discretionary government spending
government can evaluate those expenditures each year and change its budget policies
mandatory government spending
obligations with long-run commitments that might be (politically or legally) too expensive to break
Why does private saving go down in a balanced budget, with taxes going up?
the private sector spreads the burden of current tax increases across both periods and reduces current saving, shifting future resources to the current period.
twin deficit
budget deficit increases and the current account deficit increases
trade-off between PAYG system and fully funded system
based on which market returns are greater: future labor markets vs. current assets markets
if generation expects greater growth in future labor markets than assets markets, PAYG system is better. opposite (assets markets > future labor markets) means a fully funded system works better.
reform policies for a struggling PAYG system
- immigration–> increasing size of working population, N
- fertility and labor force participation policies (child care, parental half-time, matchmaking)–>increasing size of working population, N
- Increasing retirement age–>decreasing size of retiree population and increasing working population (S goes down, and N goes up)
- Reducing pension benefits
- increasing social security taxes (-b goes down, or t goes up)
- multi-pillar systems that combine PAYG with fully funded features, holding reserves for future obligations, R [Nt = Sb +R]
- income sources (beyond labor income? interest income? firm profits? capital income?) and income caps (i.e. from 100 k to 200k)
- switch form PAYG to fully funded, phasing it out slowly. (operate by birth years, slowliy decreasing contributions and benefits).
PAYG
working age population income goes to retirees (transfer). overlapping generations and agreements across contributions vs. benefits.
returns from future labor markets –> look at working age population growth, n, and real wage growth, gw. “workers per retiree”
fully funded
working age income –> retirement (saving)
acquire assets and accumulate wealth. within generations.
returns on experienced asset markets (must look at volatility in asset markets and assess risk).
what system to use if population growth rate is sufficiently large
PAYG are more efficient if the population growth rate is sufficiently large. However, if the population growth rate is too low, PAYG social programs hurt some generations.
when does PVLR (social security) > PV LR (no social security)?
if - b / (1+n) + b/(1+r) > 0 , or n>r, then it’s worth it to pursue the PAYG system. when an economy experiences an insufficient employment growth rate, then a PAYG system performs worse.