List of References
Feldstein, M., 1996, “The Missing Piece in Policy Analysis: Social Security Reform,” National Bureau of Economic Research, Working Paper No. 5413, January.
Feldstein, M., and Pellechio, a., 1979, “Social Security and Household Wealth Accumulation: New Microeconomic Evidence,” Review of Economics and Statistics, Vol. 61, August.
Hooper, P., Johnson, K., and Marquez, J. 1998, “Trade Elasticities for G-7 Countries,” International Finance Discussion Papers, No.609, April.
Leimer, D. and Lesnoy, S., 1982, “Social Security and Private Saving: New Time-Series Evidence,” Journal of Political Economy, Vol. 90(3).
Prepared by Martin Cerisola, Hamid Faruqee, and Yutong Li.
In the period after 2050, the current account deficit improves somewhat in relation to GDP. Import growth slows, as the growth of GNP declines because an increasing share of domestic output (GDP) in the United States is being transferred abroad to service external debt, leaving less income available for domestic consumption.
These elasticity estimates are based on annual data for the period 1968–97 in the, case of exports and 1961–97 in the case of imports. Hooper (1998) reports long-run income elasticities for U.S. exports and imports of 0.8 and 1.8, respectively.
Hooper (1998) reports long-run price elasticities for U.S. exports and imports of 1.5 and 0.3, respectively.
The dependency ratio is defined as the number of persons aged 65 and older or 19 and younger as a share of the working population aged 20 to 64 years. The World Bank projections are used because of their extensive country coverage.
The time profile for the long-run increase in the dependency ratio differs somewhat between the United States and other industrial countries. The dependency ratio declines in the United States until 2010, and then rises substantially above its 1998 level; for the other industrial countries, the average dependency ratio rises steadily from a level that is below that in the United States initially to one that exceeds the U.S. ratio in the long run.
In the panel estimates, changes in the total saving-investment balance in response to fiscal or demographic shocks are identically zero by construction (i.e., adding-up restriction). In the MULTIMOD simulations, this adding-up restriction for the United States and other industrial countries is not imposed as developing country groups are also included. Broad adding-up between the United States and other industrial countries may still obtain, however, given their relative economic size.
Monetary policy in the United States is assumed to aim at holding the rate of increase in the GDP price deflator to around 2 percent throughout the scenario period. Projections for the rest of the world in this scenario are based on the WEO projections to 2003. After that time, the scenario reflects an assumption that fiscal policy in the rest of the world seeks to stabilize government spending and debt in relation to GDP.
The impact on national savings, while not identical, would be similar if reductions in benefits (or a combination of benefits reductions and contribution increases) were used instead to ensure actuarial balance in Social Security and Medicare. Benefit reductions would stimulate private saving in a similar magnitude as increases in contribution rates. This is based on the substitution hypothesis advanced by Diamond (1977), in which rational decision makers would substitute expected future social security benefits for private wealth accumulation. Feldstein (1996) notes that several empirical studies have found evidence of the substitution hypothesis. However, Feldstein and Pellechio (1979) have also argued that a change in future social security benefits may have no impact on private saving behavior, if for example, households discount heavily future benefits. Leimer and Lesnoy (1982) also present empirical evidence that Social Security may have no impact on private saving.
In MULTIMOD, the long-run income elasticities for exports and imports are restricted to being 1. To test the effect of this restriction on the long-run current account projections, an alternative scenario was developed based on an income elasticity of 1 for exports and 2 for imports. The results show that the U.S. current account would still improve considerably over the next 25 years, achieving surpluses averaging 0.1 percent of GDP during the period 2006–24. As fiscal surpluses narrow, the U.S. current account would return gradually to deficits averaging about 0.9 percent of GDP in 2025–70. The real effective value of the U.S. dollar would depreciate by around 30 percent by 2025, before subsequently appreciating by about 5–10 percent. To an extent, this alternative scenario might be seen as a worse case. Over the 72-year horizon in the scenarios presented here, it would be expected that the income elasticities of exports and imports would converge.
The panel estimates in Table 2 show qualitatively similar effects of the fiscal budget on the saving-investment balance. Overall, the long-run fiscal effects on the current account are somewhat larger in the panel estimates than in the dynamic simulations.
In the balanced budget scenario, it is assumed that revenues would be adjusted to maintain budget balance. Accordingly, the ratio of revenues to GDP would initially decline from 31.8 percent in 1997 to an average of 30.3 percent in 2011–20. Subsequently, the revenue-to-GDP ratio would rise, reaching an average of almost 35 percent in 2061–70, about 7 percentage points of GDP higher than the ratio in the scenarios assuming the central fiscal policy rule. The rise in the revenue-to-GDP ratio in the balanced-budget scenario reflects the needed adjustments to revenues in the latter part of the simulation period to keep the budget in balance largely owing to rising expenditures for Social Security and Medicare.