Managing A Bulge: Policy Options for Social Security

Abstract

The authors analyze several reasonable policy options for pay-as-you-go Social Security that might be adopted in response to a temporary demographic bulge. The bulge generation enters the economy, works, retires, andexits the economy. Three of the policies maintain a balanced budget. Under the fourth policy, Social Security managers take advantage of the working bulge by initially keeping the replacement rate and tax rate fixed and accumulatinga fund. Then the replacement rate and tax rate are adjusted so that the fund accumulates while the bulge works and then is drawn down to zero as the bulge goes through retirement. This fund accumulation policy would not be adopted by a legislature responding to self-interested adults. Nevertheless, the fund accumulation policy should appeal to a benevolent social planner or citizen because it is the only policy that avoids imposing a nontrivial loss on any cohort in any stage of its life.