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Planning for the optimal mix of paygo tax and funded savings

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  • DE MENIL, GEORGES
  • MURTIN, FABRICE
  • SHESHINSKI, EYTAN

Abstract

We analyze the optimal balance between social security taxation and private saving in the provision of retirement income in dynamically efficient economies, a question at the center of policy debates in Europe and the United States. We consider the relative importance for this question of the return to capital, the internal return of the pay-as-you-go system, and the variabilities and correlation (or independence) of labor earnings and the capital return. We analyse these influences theoretically in the context of a two-period, overlapping generations model with uncertainty. We use a new method to calibrate the model using annual data on GDP per worker and the total real return on equities, from 1950 to 2002, from which we infer the stochastic characteristics of lifetime labor income and the return to lifetime savings in the US, UK, France and Japan. We obtain a range of optimal, steady-state values of the social security tax and the rate of lifetime savings. When the relative rate of risk aversion is assumed to be 2.5, the computed optimal tax varies from 5% in the United States to 22% in Japan. France is similar to Japan, and the UK is in between.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 5 (2006)
Issue (Month): 01 (March)
Pages: 1-25

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Handle: RePEc:cup:jpenef:v:5:y:2006:i:01:p:1-25_00

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Cited by:
  1. Le Blanc, Julia & Scholl, Almuth, 2011. "Optimal savings for retirement: The role of individual accounts and disaster expectations," Discussion Paper Series 1: Economic Studies 2011,33, Deutsche Bundesbank, Research Centre.
  2. Lans Bovenberg & Harald Uhlig, 2006. "Pension Sytems and the Allocation of Macroeconomic Risk," SFB 649 Discussion Papers SFB649DP2006-066, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Øystein Thøgersen, 2006. "Intergenerational Risk Sharing by Means of Pay-as-you-go Programs – an Investigation of Alternative Mechanisms," CESifo Working Paper Series 1759, CESifo Group Munich.
  4. Knell, Markus, 2008. "The Optimal Mix Between Funded and Unfunded Pensions System When People Care About Relative Consumption," Working Papers 146, Oesterreichische Nationalbank (Austrian Central Bank).
  5. repec:onb:oenbwp:y::i:146:b:1 is not listed on IDEAS
  6. D'Amato, Marcello & Galasso, Vincenzo, 2010. "Political intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 628-637, October.
  7. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
  8. Felix Kubler & Department of Economics & Department of Economics & Piero Gottardi, 2007. "Social Security and RIsk Sharing," 2007 Meeting Papers 625, Society for Economic Dynamics.
  9. Knell, Markus, 2013. "The Intergenerational Distribution of Demographic Fluctuations in Unfunded and Funded Pension Systems," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79830, Verein für Socialpolitik / German Economic Association.
  10. Corsini, Lorenzo & Spataro, Luca, 2013. "Savings for retirement under liquidity constraints: A note," Economics Letters, Elsevier, vol. 118(2), pages 258-261.

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