The Econometrics of Social Insurance Presented by: John Rust, University of Maryland This is an introduction to economic and econometric modeling of retirement behavior and the impacts of social insurance, with particular emphasis on modeling social security reform. It will not be possible to provide an in depth treatment of all aspects of this complex subject in only 4 lectures. A full treatment of the issues would requires a full year course. In view of current public concern over the world wide demographic transition and its effect on the financial solvency and long run viability of pay as you go Social Security systems, the main focus of this minicourse will be on old age and disability components of social insurance. We will also consider unemployment insurance, since it is an important ``exit route'' from the labor force in European countries. We will briefly compare and contrast the key features of existing social insurance institutions around the world, and will review the history of social insurance in order to understand the main forces affecting the evolution of these institutions. An important question is the extent to which we can explain some of the idiosyncratic features we observe in different systems throughout the world as a result of nearly optimal adaptations to heterogeneity in local environments (e.g. differences in endowments, technologies, markets, and preferences) versus being a result of a series ``historical accidents'' in a more or less trial and error process of sequential policy ``blunders'' and reforms. We consider the main explanations of why government should be in the ``social insurance business'' in the first place including a) paternalism, b) market failure, and c) redistribution of income. The first motive for governement involvement depends on the extent to which individuals are rational, far-sighted decision makers. So a significant part of the course will be devoted to theoretical and empirical analyses of individual retirement behavior -- particularly with regard to the extent to social insurance institutions affect or ``distort'' labor/leisure and consumption/savings decisions. Assuming individual rationality (and thus temporarily dismissing the paternalist motive for government intervention in social insurnace), we will study theories of ``optimal'' and ``efficient'' social insurance institutions using results from dynamic extensions of the literature on mechanism design. However we will find that this theory is a bit too abstract to say much about the particular details of efficient social insurance insitutions. Instead, more progress is being made via a less systematic approach to policy analysis, using increasingly realistic computational models to evaluate the welfare gaings and losses from alternative schemes for financing and providing social insurance benefits such as various types of fully funded and ``privatized'' Social Security systems (such as the system adopted in Chile). A large share of the course will be devoted to evaluations of various trade-offs involved in setting social insurance policy, including balancing the efficiency costs of implementing social insurance systems (e.g. its potential ``moral hazard'' or disincentive effects in crowding out private insurance markets, reducing private saving, and reducing labor supply) against the welfare gains provided by the intragenerational and intergenerational risk sharing features of social insurance institutions. Lecture I. Social Insurance institutions around the world, and the ``demographic transition'' Peracchi, Franco (1998) ``Patterns of Social Protection Expenditure in the European Union'' Gruber, J.H. and D.A. Wise (1998) Social Security and Retirement Around the World University of Chicago Press. Martin Feldstein and Jeffrey B. Liebman (2001) Social Security NBER working paper 8451. Social Security Advisory Board (1998) Social Security: Why Action Should Be Taken Soon (html format) (pdf format) II. Overview of Policy, Modeling, Data, and Econometric Issues Rust, J. (2001) ``The Econometrics of Social Insurance'' slides for New Zealand Treasury Invited Lecture, Australasian Meetings of the Econometric Society, University of Auckland, New Zealand. Rust, J. (1999) ``Strategies for Incorporating Risk in Models of Social Insurance'' Report to U.S. Social Security Administration, Urban Institute, Washington, D.C. (ps format) (pdf format) Citro, C.A. and E.A. Hanushek (eds.) (1996) Assessing Knowledge of Retirement Behavior National Research Council. Social Security Advisory Board (1999) The 1999 Technical Panel on Assumptions and Methods Citro, C.A. and E.A. Hanushek (eds.) (1997) Assessing Policies for Retirement Income National Research Council. LaLonde, R. J. (1986) ``Evaluating the Econometric Evaluations of Training Programs with Experimental Data'' American Economic Review 76-4 604-620. Heckman, James, J, V. Joseph Hotz, and M. Dabos (1987) ``Do We Need Experimental Data to Evaluate the Impact of Manpower Training on Earnings?'' Evaluation Review 11-4 395-427. Rosenzweig, Mark and Kenneth I. Wolpin (2000) ``Natural `Natural Experiments' in Economics'' working paper, University of Pennsylvania. III. Numerical Dynamic Programming with Application to Modeling Retirement Behavior Rust, J. (2001) Computational economics web site Lumsdaine, R.L. and O.S. Mitchell (1999) ``New Developments in the Economic Analysis of Retirement Behavior'' in O. Ashenfelter and D. Card (eds.) Handbook of Labour Economics. Rust, J. and C. Phelan (1997) ``How Social Security and Medicare Affect Retirement Behavior in a World with Incomplete Markets'' Econometrica 65-4 781-831. Gustman, T. and T.L. Steinmeier (1986) ``A Structural Retirement Model'' Econometica 54-3 555-584. Heyma, A. (2001) ``Lessons from a Structural Dynamic Analysis of Retirement Behavior in the Netherlands"'' Discussion paper, University of Amsterdam. Berkovec, J. Stern, S. (1991) ``Job Exit Behavior of Older Men'' Econometrica 59-1 189-210. Stock, J. and D.A. Wise (1990) ``Pensions, The Option Value of Work, and Retirement'' Econometrica 58-5 1151-1180. French, E. (2000) ``The Effects of Health, Wealth, and Wages on Labor Supply and Retirement Behavior'' manuscript, Federal Reserve Bank of Chicago. French, E. and J. Jones (2001) ``The Effects of Health Insurance and Self-Insurance on Retirement Behavior'' manuscript, Federal Reserve Bank of Chicago. Blau, D. and Gilleskie, D. (2000) ``A Health Insurance and the Retirement of Married Couples'' manuscript, University of North Carolina. Benitez-Silva, H. (2001) ``The Annuity Puzzle Revisited'' Hubbard, R.G. J. Skinner and S.P. Zeldes (1995) ``Precautionary Saving and Social Insurance'' Journal of Political Economy 103 360-399. IV. Econometric Methods for Structural Estimation of Dynamic Programming Models Rust, J. (1994) ``Structural Estimation of Markov Decision Processes'' in R. Engle and D. McFadden (eds). Handbook of Econometrics volume 4. Rust, J. and G. Hall (2001) ``Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market'' V. Welfare and Welfare Reform Keane, M. and R. Moffitt (1998) ``A Structural Model of Multiple Welfare Program Participation and Labor Supply'' International Economic Review Keane, M. (1995) ``A New Idea for Welfare Reform'' Quarterly Review of Federal Reserve Bank of Minneapolis Spring, 1995, 2-28. Meyer, B. and J. X. Sullivan (2001) ``The Effects of Welfare and Tax Reform: The Material Well-Being of Single Mothers in the 1980s and 1990s. NBER Working paper 8298. Michalopoulos, C. P. K. Robins and D. Card (2001) ``When Work Incentives Pay for Themsevles: Evidence from a Randomized Social Experiment for Welfare Recipients'' manuscript, University of California at Berkeley. VI. Social Security Reform and the Debate over Privatizating Social Security Bohn, H. (1999) ``Should the Social Security Trust Fund Hold Equities? An Intergenerational Welfare Analysis'' Review of Economic Dynamics 2-3 666-697. Feldstein, M. (ed.) (1998) Privatizing Social Security University of Chicago Press. Geanakoplos, J. Mithcell, O. and S. Zeldes (1999) ``Social Security Money's Worth'' manuscript, Yale University. Geanakoplos, J. Mithcell, O. and S. Zeldes (1999) ``Would a Privatized Social Security System Really Pay a Higher Rate of Return ?'' manuscript, Yale University. Cooley, T. and J. Soares (1999) ``Privatizing Social Security'' Review of Economic Dynamics 2-3 731-755. Kotlikoff, L. K. Smetters, and J. Walliser (2001) ``Finding a Way Out of America's Demographic Dilemma'' NBER working paper 8258. VII. Overlapping Generations Models of Social Security Eckstein, Z. Eichenbaum, M. Peled, D. (1985) ``Uncertain Lifetimes and the Welfare Enhancing Properties of Annuity Markets and Social Security'' Journal of Public Economics 26 303-326. Huang, H. S. Imrohoroglu, and T.J. Sargent (1997) ``Two Computations to Fund Social Security'' Macroeconomic Dynamics 1-1 7-44. Storesletten, K. Telmer, C. and A. Yaron (1998) ``The Risk Sharing Implications of Alternative Social Security Arrangements'' in C. Plosser (ed.) The Carnegie-Rochester Conference on Public Policy. Fuster, L. (1999) ``Is Altruism Important for Understanding the Long-Run Effects of Social Security?'' Review of Economic Dynamics 2-3 616-637. Imrohoroglu, Ayse, S. Imrohoroglu, and D. H. Joines (1995) ``A Life Cycle Analysis of Social Security'' Economic Theory 6-1 83-114. Imrohoroglu, Ayse, S. Imrohoroglu, and D. H. Joines (2000) ``Time Inconsistent Preferences and Social Security'' working paper, Marshall School of Business, University of Southern California. Imrohoroglu, A, S. Imrohoroglu, and D. H. Joines (1999) ``Social Security in an Overlapping Generations Economy with Land'' Review of Economic Dynamics 2-3 638-665. Hubbard, R. G. and K.L. Judd (1987) ``Social Security and Individual Welfare'' American Economic Review 77-4 630-646. Imrohoroglu, A. S. Imrohoroglu, and D.H. Joines (1993) ``A Numerical Algorithm for Solving Models with Incomplete Markets'' International Journal of Supercomputer Applications 7-3 212-231. Imrohoroglu, A. S. Imrohoroglu and D. Joines (1995) ``A Life Cycle Model of Social Security'' Economic Theory 6 83-114. Imrohoroglu, A. S. Imrohoroglu and D. Joines (1999b) ``Computational Models of Social Security'' in R. Marimon and A. Scott (eds.) Computational Methods for the Study of Dynamic Economies Oxford University Press, 221--237. Huggett, M. and G. Ventura (1999) ``On the Distributional Effects of Social Security Reform'' Review of Economic Dynamics 2-3 498-531. De Nardi, M. S. Imrohoroglu and T. J. Sargent (1999) ``Projected U.S. Demographics and Social Security'' Review of Economic Dynamics 2-3 575-615. VII. Disability Insurance Bound, J. and R.V. Burkhauser (1998) ``Economic Analysis of of Transfer Programs Targeted on People with Disabilities'' forthcoming in O. Ashenfelter and D. Card (eds.) Handbook of Labour Economics. Social Security Advisory Board (1998) How SSA's Disability Programs Can Be Improved (html format) (pdf format) Aarts, L.J.M. and P.R. De Jong (1992) Economic Aspects of Disability Behavior North Holland, Amsterdam. Diamond, P. and J.A. Mirrlees (1978) ``A Model of Social Insurance with Variable Retirement'' Journal of Public Economics 10 295-336. Parsons, D.O. (1996) ``Imperfect `Tagging' in Social Insurance Programs'' Journal of Public Economics 62 183-207. Rust, J. (2001) ``Modeling Behavioral Responses to Changes in Social Security: A Life-Cycle Framework'' Bound, J., Julie B. Cullen,and L. Schmidt (2000) ``The Welfare Implications of Increasing DI Benefit Generosity'' NBER working paper. Benitez-Silva, H., M. Buchinsky and J. Rust (2001) ``An Empirical Model of Social Insurance at the End of the Life Cycle'' Benitez-Silva, H., Buchinsky, M. Chan, H. and S. Sheidvasser (1999) ``An Empirical Analysis of the Social Security Disability Application, Appeal and Award Process'' Journal of Labour Economics. Benitez-Silva, H., Buchinsky, M. Chan, H. and S. Sheidvasser (2000) ``How Large is the Bias in Self-Reported Disability Status?'' manuscript, Yale University (ps format) (pdf format) Kreider, Brent and John V. Pepper (2001) ``Inferring Disability Status from Corrupt Data'' manuscript, Iowa State University. David H. Autor and Mark G. Duggan (2001) ``The Rise in Disability Recipiency and the Decline in Unemployment'' John Bound and Timothy Waidmann (2001) ``Accounting for Recent Declines in Employment Rates among the Working-Aged Disabled'' NBER working paper 7975. Axel Borsch-Supan (2000) ``Incentive Effects of Social Security Under an Uncertain Disability Option'' NBER working paper 7339. Hilary Williamson Hoynes and Robert Moffitt (1999) ``Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms'' NBER working paper 6058. VIII. Unemployment Insurance Hopenhayn, H. and J.P. Nicolini (1997) ``Optimal Unemployment Insurance'' Journal of Political Economy 105-2 412-438. Ljungqvist, L. and T.J. Sargent (1998) ``The European Unemployment Dilemma'' Journal of Political Economy 106-3 514-550. Ljungqvist, L. and T.J. Sargent (1995) ``Welfare States and Unemployment'' Economic Theory 6 143-160. Ljungqvist, L. and T.J. Sargent (1995) ``The Swedish Unemployment Experience'' European Economic Review 39 1043-1070. Ljungqvist, L. and T.J. Sargent (2001) ``European Unemployment from a Worker's Perspective'' IX. Political Economy of Social Security Lindbeck, A. (1995) ``Hazardous Welfare State Dynamics'' American Economic Review 85-2 9-15. Browning, E.K. (1975) ``Why the Social Insurance Budget is Too Large in a Democratic Society'' Economic Inquiry 13 373-388. Boldrin, M. and A. Rustichini (2000) ``Political Equilibria with Social Security'' Review of Economic Dynamics 3-1 41-78. Conesa, J. and D. Krueger (1999) ``Social Security Reform with Heterogeneous Agents'' Review of Economic Dynamics 2-4 757-795. Galasso, V. (1999) ``The U.S. Social Security System: What Does Political Sustainability Imply?'' Review of Economic Dynamics 2-3 698-730. X. Is there a tradeoff between the level of progressivity/redistibution and growth/real income? Caucutt, E.M. S. Imrohoroglu and K. Kumar (2000) ``Does the Progressivity of Taxes Matter for Economic Growth?'' Federal Reserve Bank of Minneaapolis Discussion paper 138. Alwyn Young (2001) ``Demographic Fluctuations, Generational Welfare and Intergenerational Transfers'' NBER working paper 8530.