A Framework for Cost-Benefit Analysis of Totalization Agreements

Authors

Abstract

International social security totalization agreements eliminate double social security taxation for workers who reside and work in different country from their home country. Because totalization agreements affect a number of economic agents in a variety of ways, we develop a cost-benefit framework of totalization agreements to facilitate the comparison and assessment of these impacts from a cost-benefit perspective. It lists the important stakeholders and the types of potential effects of the agreement on them, and attempts to quantify each type of effects for each stakeholder. The framework can be useful to policy makers and researchers to evaluate the economic implications of current or proposed future agreements, depending on scenarios of economic conditions, characteristics of partner countries, and how they affect different stakeholders. The paper also summarizes what is currently known about the effects and related costs and benefits of totalization agreements. We provide relatively simple and straightforward example calculations for some of these effects, as well as calculations using a stylized micro-economic model for workers and a stylized macro-economic model for firm investment and production allocation. In a few cases, we have both simple calculations of direct effects and model calculations that take more channels into account (under strong assumptions), and they agree well, implying that the simple calculations capture most of the total effect.

Key Findings

  • A cost-benefit framework can be a useful tool to prospectively or retrospectively analyze totalization agreements. It lists the stakeholders groups and the types of potential effects of the agreement on them, and attempts to quantify each effect type for each stakeholder.
  • The key stakeholders are U.S. workers who potentially could be sent on a temporary or longer-term assignment to a partner country; employers of these workers; the Social Security Administration and U.S. government more broadly; competitor firms, suppliers, and clients of the directly affected firm; and the economy as a whole, as well as the counterparts of these in the partner country.
  • The direct effects are reduced social security taxes paid by employers and employees, increased eligibility of some workers for Social Security benefits, and the resulting effects on the benefit amounts.
  • Other effects take place through the reduction in the costs associated with multinational production. By making it less costly for firms to relocate their resources abroad, these agreements increase international flows of workers; Foreign Direct Investment and capital flows; facilitate more efficient production and international trade; and may affect the Gross Domestic Product and Gross National Product.
  • We provide relatively simple and straightforward example calculations for some of these effects, as well as calculations using a stylized microeconomic model for workers and a stylized macroeconomic model for firm investment and production allocation. In a few cases, we have both simple calculations of direct effects and model calculations that take more channels into account (under strong assumptions), and they agree well, implying that the simple calculations capture most of the total effect.
  • We have identified important gaps in data availability and knowledge of parameters and firm and worker behavior. Less data availability implies that stronger assumptions need to be made or more scenarios need to be evaluated.

Citation

Meijer, Erik, Francisco Pérez-Arce, and María Prados. 2020. “A Framework for Cost-Benefit Analysis of Totalization Agreements.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2020-410. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp410.pdf

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Project

Paper ID

WP 2020-410

Publication Type

Working Paper

Publication Year

2020
pavement-enterprise