Laurence J. Kotlikoff

Boston University | BU · Department of Economics

Deficit finance, a.k.a. pay-go policy, is free when growth rates routinely exceed safe government borrowing rates. Or so many say. This note presents four counterexamples based on four versions of a simple OLG economy. In each version the growth rate exceeds the safe rate for one of four reasons – uninsured idiosyncratic risk, uninsured aggregate r...

Bank failures are generally liquidity as well as solvency events. Whether it is households running on banks or banks running on banks, defunding episodes are full of drama. This theater has, arguably, lured economists into placing liquidity at the epicenter of financial collapse and liquidity provision as opposed to improved intermediation as the r...

The replacement of positive with normative economics has left climate policy in its sorry state – as a fight between generations, across regions, and even among economists over climate justice. This column uses a multi-region, overlapping generations model of climate change to study climate policy as an externality whose resolution can uniformly an...

We simulate a 10‐period overlapping generations model with aggregate shocks to price safe and risky government obligations using consumption‐asset pricing. Agents cannot trade with future generations to hedge the model's productivity and depreciation shocks, and can only invest in one‐period bonds and risky capital. We find that the pricing of shor...

Many, if not most, baby boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, boomers must look to their own devices to rescue their retirements, namely, working harder and long...

This paper projects China's national savings through 2040 based on China's national account data, demographic data, and data on rural and urban life-cycle income and consumption. Our baseline projections show that China's national saving in 2040 will be 16 times the current national saving. The annual growth rate of wealth will decline from 16.3 pe...

Will incomes of low and high skilled workers continue to diverge? Yes, according to our paper’s dynamic, six-good, five-region – U.S., Europe, N.E. Asia (Japan, Korea, Taiwan, Hong Kong), China, and India, general equilibrium, life-cycle model. The model, which endogenizes specialization and features incomplete factor-price equalization, predicts a...

Purpose: Some discussions of physician specialty choice imply that indebted medical students avoid choosing primary care because education debt repayment seems economically unfeasible. The authors analyzed whether a physician earning a typical primary care salary can repay the current median level of education debt and meet standard household expe...

This paper studies the effects of a fiscal transfer program on the sustainability of an economy. We use a simple overlapping generations model with aggregate uncertainty in which households have rational expectations to show how the size of the fiscal transfer program affects the expected time in which the economy will reach its fiscal limit. We ca...

The United States is bankrupt, flat broke. Thanks to accounting that would make Enron blush, America’s insolvency goes far beyond what our leaders are disclosing. The United States is a fiscal basket case, in worse shape than the notoriously bailed-out countries of Greece, Ireland, and others. How did this happen? In The Clash of Generations, exper...

This paper takes a close look at the cause and consequences of economic deficits from the perspective of neoclassical models of saving. Analysis of the crowding-out mechanism leads immediately to defining economic deficits as redistribution toward older generations. Once one observes that such intergenerational redistribution underlies arguments ab...

The economics workings of the corporate income tax remain controversial. Harberger’s seminal 1962 article viewed the tax as raising the cost of capital used to produce corporate goods. But corporate goods can be and generally are made by non-corporate firms, suggesting that the corporate tax penalizes the act of incorporating, not the decision of a...

The world's leading economies, both developed and developing, are engaged in an ever-changing economic symbiosis that is governed in large part by demographics and technological change, but also by pension, healthcare, and other fiscal policies. This interconnected economic evolution--what economists call general equilibrium growth--holds important...

China’s high savings rate and low consumption rate have become a major concern of policy-makers in China, as well as in the rest of the world. This paper integrates China’s demographic and national account data with age and sex profiles of household consumption- and labor earnings to project China’s national savings through 2030. Our baseline proje...

This paper marks Social Security’s open group liability to market taking into account the riskiness of its aggregate benefit payments and tax receipts. The open group liability references the present value of the system’s net cash flow from now through the indefinite future. We treat the growth rates of the system’s aggregate benefits and taxes as...

The current American health care system is beyond repair. The problems of the health care system are delineated in this discussion. The current health care system needs to be replaced in its entirety with a new system that provides every American with first-rate, first-tier medicine and that doesn't drive our nation broke. The author describes a 10...

National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17 percent of national income in 1970, but less than 7 percent in 2006. Japan saved 30 percent in 1970, but only 8 percent in 2006. And the U.S. saved 9 perc...

Laurence J. Kotlikoff is Professor of Economics at Boston University, Research Associate of the National Bureau of Economic Research, Fellow of the American Academy of Arts and Sciences, Fellow of the Econometric Society, and President of Economic Security Planning, Inc., a company specializing in financial planning software. Professor Kotlikoff re...

Will incomes of low and high skilled workers continue to diverge? Yes says our paper's dynamic, six-good, five-region - U.S., Europe, N.E. Asia (Japan, Korea, Taiwan, Hong Kong), China, and India -, general equilibrium, life-cycle model. The model predicts a near doubling of the ratio of high- to low-skilled wages over the century. Increasing wage...

This study uses Fehr et al. [Fehr, H., Jokisch, S., & Kotlikoff, L. J. (2004a). The role of immigration in dealing with the developed world's demographic transition. FinanzArchiv, 60, 296-324; Fehr, H., Jokisch, S., & Kotlikoff, L. J. (2005). The developed world's demographic transition--the roles of capital flows, immigration, and policy. In R. Br...

This paper explains how "pension reform," as it has been practiced in Chile and elsewhere, may simply constitute a relabeling of existing fiscal institutions that end up imposing high investment and insurance fees on workers.

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...

Laurence Kotlikoff argues that the official United States deficit does not look too terrible, but it is a terrible measure of the government's economic health: The truth is a $70 trillion long run imbalance that is growing at $2 trillion per year.

America's aging coupled with high and growing old age health and pension benefits augers for much higher payroll taxes, with damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model. The FairTax, which proposes to replace the federal payroll, personal income, corpor...

Is the U.S. bankrupt? Or to paraphrase the Oxford Dictionary, is the U.S. at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors? Many would scoff at this notion. They’d point out that the country has never defaulted on its debt, that its debt-to-GDP r...

Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during...

The shocking statistic is that forty-seven million Americans have no health insurance. When uninsured Americans go to the emergency room for treatment, however, they do receive care--and a bill. Many hospitals now require uninsured patients to put their treatment on a credit card--which can saddle a low-income household with unpayably high balances...

As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on...

This paper determines the standard of living reductions that young, middle aged, and older households would experience were the U.S. government to cut Social Security benefits (but not taxes) to deal with its well documented (see Gokhale and Smetters, 2005) long-term fiscal crisis. To determine pre- and post-retirement living standards in the absen...

A century ago, everyone thought time and distance were well defined physical concepts. But neither proved absolute. Instead, measures/reports of time and distance were found to depend on one’s reference point, specifically one’s direction and speed of travel, making our apparent physical reality, in Einstein’s words, “merely an illusion.” Like time...

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can...

Laurence Kotlikoff gives the current tax system a D, the President’s Tax Reform Panel proposal a B+ and explains what his A+ tax system would look like.

Laurence Kotlikoff argues that it is high time the U.S. gets its fiscal house in order, and he tells us exactly how with three big ideas.

Laurence Kotlikoff presents a humorous take on Lawrence Summers' alleged suggestion that economists are smarter than sociologists.

This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging requiring major fiscal adjustments.In previous studies that excluded China we p...

Japan is the now the oldest country in the world and getting older by the day. Currently there are almost 3 Japanese of working age per Japanese person of pensionable age. By 2040, this ratio will be 1 to 1. The graying of Japan reflects fertility and mortality rates that, demographically speaking, are hard to believe. In 1950 Japan’s fertility rat...

In short, Cooper tells us not to worry about our current account or its underlying causes. I have a much darker and, I believe, more accurate view of our current account deficit. While I agree with much of what Cooper says, I disagree most strongly with his central thesis that the current account portends no major problem. To the contrary, the curr...

America's aging coupled with high and growing old- age health and pension benefits augers for much higher payroll taxes, with damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model. The FairTax, which proposes to replace the federal payroll, personal income, corpo...

In this paper we study the feasibility of estimating a monetary value for a QALY (MVQ). Using two different surveys of the Spanish population (total n� =� 892), we consider whether willingness to pay (WTP) is (approximately) proportional to the health gains measured in QALYs. We also explore whether subjects' responses are prone to any significant...

Government healthcare expenditures have been growing much more rapidly than GDP in OECD countries. For example, between 1970 and 2002 these expenditures grew 2.3 times faster than GDP in the U.S., 2.0 times faster than GDP in Germany, and 1.4 times faster than GDP in Japan. How much of government healthcare expenditure growth is due to demographic...

Recent and proposed fiscal policies-the tax cuts, proposals to make them permanent, and the Medicare prescription drug bill-will hurt economic prospects for most of the today's children and all future generations. The programs will leave economic growth largely unchanged, but will redistribute resources from future to current generations and, withi...

This paper develops and simulates a dynamic model of strategic telecom competition. The goal is to understand how regulatory policy, particularly relative to lease charges for local network elements, affects telecom competition, investment, retail prices, and consumer welfare. The model assumes two products, local voice service and data (broadband)...

This paper develops a three-region dynamic general-equilibrium life-cycle model to analyze general and skill-specific immigration policy in the U.S., Japan, and the E.U. Immigration is often offered as a solution to the remarkable demographic transition underway in the developed world. However, the precise net impact of expanded immigration is quit...

Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To capture this distinction, we adopt the multiple-priors utility model. We show that the impact of ambiguity on...

In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government...

The paper by Jagadeesh Gokhale and Laurence Kotlikoff tackles the issue of the redistributive features of the US tax and benefit system. The analysis is based on a microsimulation model which simulates in great detail taxes and transfer payments respectively paid and received by a representative two-earner couple in a lifetime perspective. Lifetime...

Originally published in 2003, this book contains fifteen major essays on international economics. The authors investigate five principal themes: theory, and empirics, of financial issues in open economies; economic growth; public economies; and political economy. Written to honor Professor Assaf Razin of Tel Aviv and Cornell Universities on the occ...

Using data on older workers from the 1992 Health and Retirement Survey along with an elaborate life-cycle planning model, we quantify the extent to which the death of each individual would affect the financial status of his or her survivors, and we measure the degree to which life insurance holdings moderate these consequences. The average change i...

Using the 1995 Survey of Consumer Finances and an elaborate life-cycle model, we quantify the potential financial impact of each individual's death on his or her survivors and measure the degree to which life insurance moderates these consequences. Life insurance is essentially uncorrelated with financial vulnerability at every stage of the life cy...

The developed world stands at the fore of a phenomenal demographic transition. Over the next 30 years the number of elderly in the OECD countries will more than double. At the same time, the number of workers available to pay the elderly their government-guaranteed pension and health care benefits will rise by less than 10 percent. These two demogr...

One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not cu...

Generational policy is a fundamental aspect of a nation's fiscal affairs. The policy involves redistributing resources across generations and allocating to particular generations the burden of paying the government's bills. This chapter in Volume 4 of the Handbook of Public Economics shows how generational policy works, how it is measured, and how...

This study presents intertemporal budgeting as of 1999 for all 50 U.S.states. Intertemporal state budgeting compares the present value of a state's projected receipts with the present value of its projected expenditures (exclusive of interest payments)plus the current value of its net debt (liabilities minus assets). Our projections start with the...

In this paper we study the feasibility of estimating a monetary value for a QALY (MVQ). Using two different surveys of the Spanish population (total n� =� 892), we consider whether willingness to pay (WTP) is (approximately) proportional to the health gains measured in QALYs. We also explore whether subjects' responses are prone to any significant...

This paper examines whether middle age American households purchase adequate amounts of life insurance. The analysis is based on SRI International's 1980, 1982, and 1984 surveys of the financial positions of American households. Our findings indicate that a significant minority of American wives are highly underinsured with respect to the possible...

This chapter utilizes an extensive simulation model to produce lifetime incomes of current and future employees, and evaluates the impacts of alternative reforms on the implicit rates of return that individuals in different income and demographic groups receive on their Social Security taxes. It is found that education seems to trump income in expl...

This chapter describes the distribution of wealth. Wealth inequality exists in the absence of skill inequality, which is due to differences across households in the number of timing of their children and in the rates of return earned on their saving. Moreover, the role of inheritances and social security in wealth inequality is discussed. Social Se...

This chapter utilizes a computable general equilibrium model to analyze how the shift to an investment-based system would change wages and interest rates. Social Security's privatization can considerably raise long-run living standards. It also helps the long-run poor even absent any explicit redistribution mechanism. The long-run gains to Social S...

Using the 1995 Survey of Consumer Finances and an elaborate life-cycle model, we quantify the potential financial impact of each individual's death on his or her survivors, and we measure the degree to which life insurance moderates these consequences. Life insurance is essentially uncorrelated with financial vulnerability at every stage of the lif...

Contributing to 401(k)s and similar tax-deferred retirement accounts certainly lowers current taxes. But does it lower your lifetime taxes? If average and marginal tax rates were independent of income and didn't change through time, the answer would be an unambiguous yes. The reduction in current taxes would exceed the increase in future taxes when...

This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of five fundamental alternatives to the U.S. federal income tax: a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the X tax...

This paper extends the Auerbach-Kotlikoff life-cycle simulation model by incorporating demographic change, including lifespan extension, and multiple earnings groups within each cohort. The model is used to study the U.S. demographic transition. To ensure a realistic pattern of fertility by age, the model assumes that each agent gives birth to frac...

As public expenditures on health, education and transfer programmes increase, demographic change has a growing impact on public expenditures, and the incentives for behaviour created by public transfer programs increase as well. The essays in this volume discuss such topics as: demographic change and the outlook for Social Security and Medicare in...

Using data on older workers from the 1992 Health and Retirement Survey, along with an elaborate life-cycle planning model, the authors quantify the effect of each individual's death on the financial status of his or her survivors and the degree to which life insurance holdings moderate these consequences. The average change in living standard that...

Thanks to recent changes in the tax law, people can contribute more to their tax-deductible and non-tax-deductible savings plans, including 401(k) and Roth IRAs. But should they? The myriad interacting provisions of the tax code make it difficult to predict who will gain from government savings incentives and by how much. This study examines how ne...

This paper develops and simulates a three-period life-cycle model with aggregate uncertainty. The model incudes a market in risk-free bonds. The paper studies how uncertainty in fiscal policy affects welfare, the equity premium, risk-sharing, and the caculation of generational accounts.

One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not cu...

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...

Generational Accounting measures the burden that current fiscal policies are likely to impose on future generations. It also identifies the set of policy reforms needed to achieve generational balance a situation in which future generations face the same lifetime net tax rates as current generations. This paper presents the first set of generationa...

How much should Americans save prior to retirement? Given Social Security's shaky financial condition, this is a critical question for baby boomers. A financial planning program-ESPlanner-is applied to data from the Health and Retirement Survey (HRS) to consider the amount that households approaching retirement should save.

Retirees are one of the wealthiest segments of the U.S. population, and today's retirees have more wealth than any previous generation. Some have conjectured that bequests out of this wealth will significantly boost the resources of the baby boomers-the next generation of retirees-bridging the gap between their retirement needs and resources. This...

This study examines the adequacy of life insurance among married American couples approaching retirement. It improves upon previous work in two ways. First, it is based on recent, high quality data (the 1992 Health and Retirement Survey with matched Social Security earnings histories). Second, it employs new financial planning software to evaluate...

The conventional approach to retirement and life insurance planning, which is used throughout the financial planning industry, differs markedly from the economic approach. The conventional approach asks households to specify how much they want to spend before retirement, after retirement, and in the event of an untimely death of the head or spouse....

This paper uses a new version of the Auerbach–Kotlikoff model to consider alternative ways to privatize the U.S. Social Security System. The new model incorporates intra- and intergenerational heterogeneity and is closely calibrated to U.S. fiscal institutions. Three privatization issues are considered: financing the transition, participation rules...

This paper develops, calibrates, and simulates a dynamic 88-period OLG model to study the intergenerational transmission of U.S. wealth inequality via bequests. The model features marriage, realistic fertility patterns, random death, assortative mating based on skills, heterogeneous skill endowments, heterogeneous rates of return, skill inheritabil...

Generational accounting is a relatively new method of long-term fiscal planning and analysis. This paper presents a selection of the latest generational accounting results for 22 countries.