"Social Security a Fresh Look at Policy Alternatives"

By Calimeris, Lauren | Indian Journal of Economics and Business, May-December 2013 | Go to article overview

"Social Security a Fresh Look at Policy Alternatives"


Calimeris, Lauren, Indian Journal of Economics and Business


"SOCIAL SECURITY A FRESH LOOK AT POLICY ALTERNATIVES", Gokhale, Jagadeesh (2010), University of Chicago Press.

In light of the perilous state of the U.S. government's finances and the impending retirement of the baby-boom generation, having a deeper understanding and clearer picture of Social Security's finances is imperative. Currently, the Social Security trustees use an outdated and unsophisticated estimation technique to estimate Social Security's finances that does not account for interrelationships between demographic and economic characteristics. To address this shortcoming, the author constructs a microsimulation of US demographic and economic features, DEMSIM, or Demographic and Economic Microsimulation. Gokhale's key innovation and differentiating aspect of his model is the incorporation of interactions between the demographic and economic variables. He then uses DEMSIM to analyze the effects of six policy proposals on the program's finances and on various subgroups of the population.

Gokhale divides his book into two parts. The first motivates the need for his model, develops it, and compares and contrasts his model and its projections with current methods. The second part of the book implements the model in analyzing the effects of different policy proposals.

In Chapter 1, Gokhale discusses the current methods for analyzing Social Security's finances and points out shortfalls with these current methods. He discusses the key variables of his model, including demographic variables such as mortality, fertility, marital status, and racial and family composition, as well as economic variables such as education, skill acquisition rates, labor force participation, productivity, and earnings. He also explains and interprets the key outcomes of interest, including measures of open and closed group imbalances, lifetime net tax rates, and retirement wealth and Social Security benefits.

Chapters 2 through 5 describe and derive DEMSIM. In Chapter 2, the author describes the simulation process and how the model works. He carefully explains each variable, how he attained and calculated them. He motivates the need for the interactions of the variables and provides tangible examples of why the interactions are necessary. He then shows how well his model simulates the 1970 population, his starting point for the model. In chapter 3, he has his model simulate the economy from 1970 to 2006, where his data end. Again, he addresses each of the key variables and discusses how they change over the 30 year time frame. He compares his simulations to the actual historical data, and painstakingly details how close the simulations match the historical data. Overall, the model appears to simulate the historical demographic and economic changes from 1970-2006 quite closely, lending credit to the model and its ability to forecast into the future.

In chapter 4, the author projects into the future and shows how his model forecasts changes in the economic and demographic variables. In chapter 5, heinteracts the variables to derive "core labor inputs," upon which he bases earnings and Social Security taxes. He then simulates the labor earnings from 1970 through 2006 and shows how his earnings assignments closely mirror official estimates during the same time period.

In general, Gokhale is very careful and thoughtful about the derivation of his model and his calculations of key variables of interest. His meticulous comparisons between the historical data and his simulations lend credibility to his model and his estimation methods.

After validating his model, Gokhale uses it to simulate Social Security's finances from 2006 onward. In Chapter 6, he compares his calculations of Social Security's finances to official estimates. He finds a lower projected growth in the tax base than do official estimates. This finding is primarily as a result of his interactions between the economic and demographic variables. …

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