Roth versus traditional accounts in a life-cycle model with tax risk

2012 ◽  
Vol 12 (1) ◽  
pp. 28-61 ◽  
Author(s):  
MARIE-EVE LACHANCE
Keyword(s):  
Life Cycle ◽  
Social Security ◽  
Risk Reduction ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Retirement Accounts ◽  
Small Risk ◽  
Traditional Account ◽  
Welfare Losses ◽  
Social Security Benefits

AbstractThis paper analytically solves a life-cycle model that compares traditional and Roth retirement accounts. It includes realistic features such as tax deductibility of contributions and taxation of withdrawals, tax bracket structure with deductions, taxation of Social Security benefits, and tax risk at retirement. With current taxes, choosing a traditional account over a Roth creates small welfare losses in only a few cases, largely for those with higher incomes and pensions who are subject to the taxation of Social Security benefits. We also investigate tax variability and find that diversified strategies offer only small risk reduction benefits in our illustrations.

scholarly journals The Presidents Social Security Plan: How much would you pay to participate?

2011 ◽  
Vol 4 (4) ◽  
Author(s):  
Frank Caliendo ◽  
Allen B. Atkins
Keyword(s):  
Life Cycle ◽  
Social Security ◽  
Life Cycle Model ◽  
Present Value ◽  
Cycle Model ◽  
Rates Of Return ◽  
Social Security Program ◽  
Retirement Accounts ◽  
Long Time ◽  
President Bush

President Bush is in favor of using private retirement accounts to partially replace the current pay-as-you-go social security program.  We use a simple life-cycle model to analyze whether or not private accounts would benefit workers.  "Cash equivalents" are calculated under different assumptions to see how much a worker would be willing to pay to participate in the private account program.  In most circumstances, workers would benefit from the private account program.  Only when market rates of return are very low or a person expects to live for a very long time does the current pay-as-you-go system give a greater present value to a worker.

scholarly journals A historical welfare analysis of Social Security: Whom did the program benefit?

10.3982/qe657 ◽  
2019 ◽  
Vol 10 (4) ◽  
pp. 1357-1399 ◽  
Author(s):  
William B. Peterman ◽  
Kamila Sommer
Keyword(s):  
Life Cycle ◽  
Steady State ◽  
Social Security ◽  
Welfare Effects ◽  
Welfare Effect ◽  
Life Cycle Model ◽  
Cycle Model ◽  
The Great Depression ◽  
Standard Life ◽  
Program Benefit

A well‐established result in the literature is that Social Security reduces steady state welfare in a standard life cycle model. However, less is known about the historical quantitative effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security generally improved these cohorts' welfare, in part because these cohorts received far more benefits relative to their contributions than they would have received if they lived their entire life in the steady state with Social Security. Moreover, the negative general equilibrium welfare effect of Social Security associated with capital crowd‐out was reduced during the transition, because it took many periods for agents to adjust their savings levels in response to the program's adoption. The positive welfare effect experienced by these transitional agents offers one explanation for why the program that may reduce welfare in the steady state was originally adopted.

scholarly journals It Sucks to Be Single! Marital Status and Redistribution of Social Security*

2020 ◽  
Author(s):  
Max Groneck ◽  
Johanna Wallenius
Keyword(s):  
Life Cycle ◽  
Life Expectancy ◽  
Social Security ◽  
Marital Status ◽  
Labour Supply ◽  
Life Cycle Model ◽  
Depressing Effect ◽  
Cycle Model ◽  
Marriage Stability ◽  
The Us

Abstract In this article, we study the labour supply effects and the redistributional consequences of the US social security system. We focus particularly on auxiliary benefits, where eligibility is linked to marital status. To this end, we develop a dynamic, structural life cycle model of singles and couples, featuring uncertain marital status and survival. We account for the socio-economic gradients to both marriage stability and life expectancy. We find that auxiliary benefits have a large depressing effect on married women’s employment. Moreover, we show that a revenue neutral minimum benefit scheme would moderately reduce inequality relative to the current US system.

scholarly journals The Life-Cycle Model of Consumption and Saving

2001 ◽  
Vol 15 (3) ◽  
pp. 3-22 ◽  
Author(s):  
Martin Browning ◽  
Thomas F Crossley
Keyword(s):  
Life Cycle ◽  
Empirical Evidence ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Welfare Losses ◽  
Theoretical Predictions ◽  
Consumption And Saving ◽  
Life Cycle Models

A central implication of life-cycle models is that agents smooth consumption. We review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime. We find that life-cycle models--particular those which incorporate realistic features of markets and goods--have more empirical successes than failures. We also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents. Finally, we emphasize that the coherence of life-cycle models imposes an important discipline when incorporating new features into models.

scholarly journals How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior

2018 ◽  
Author(s):  
Vanya Horneff ◽  
Raimond Maurer ◽  
Olivia S. Mitchell
Keyword(s):  
Life Cycle ◽  
Social Security ◽  
Expected Returns ◽  
Financial Conditions ◽  
Retirement Accounts ◽  
Retirement Behavior ◽  
Rate Environment ◽  
Large Peak ◽  
Social Security Benefits ◽  
Second Peak

This chapter explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, compared to what in the past had been conceived of as ‘normal’ financial conditions. Using a calibrated life cycle dynamic model with realistic tax, minimum distribution, and social security benefit rules, we can mimic the large peak at the earliest claiming age at 62 that is seen in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero-return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim social security benefits later in a low interest rate environment.

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