| Description: |
Many governments promise pension and medical benefits to their elderly citizens. As the world is aging, the burden of retiree benefits is becoming painfully obvious. Uncertainty about the future makes planning for retiree benefits even more difficult. Who will suffer or gain financially if the future differs from what we expect? We face, for example, tremendous uncertainty about the speed of technical progress, about medical cost, and about trends in fertility and longevity. Government policy determines not only the level of taxes and benefits, but also who bears the risk of unexpected changes. Traditional retirement programs largely exempt retirees from sharing risk. By making fixed, unconditional promises, they necessarily impose a more than proportional risk on younger cohorts and on future generations. The paper examines the impact of alternative tax, pension, and health care policies on different cohorts. How do existing policies shift risk across cohorts? Are there conditions under which such policies might be appropriate in the interest of general welfare? Is there scope for better policies, and in which direction? The analysis focuses on the United States and covers the main fundamental sources of risk—productivity, fertility, longevity, health, and asset valuation. |