Advanced Search
MyIDEAS: Login to save this paper or follow this series

Finding a Way Out of America's Demographic Dilemma

Contents:

Author Info

  • Laurence J. Kotlikoff
  • Kent Smetters
  • Jan Walliser

Abstract

Notwithstanding the rosy short-term fiscal scenarios being advanced in Washington, the demographic transition presents the United States with a very serious fiscal crisis. In 30 years there will be twice the number of elderly, but only 15 percent more workers to help pay Social Security and Medicare benefits. A realistic reading of the government demographic projections suggests a two thirds increase in payroll tax rates over the next three to five decades. However, these forecasts ignore macroeconomic feedback effects. In particular, they ignore the possibility that the nation will have more capital per worker as the number of elderly wealth-holders rises relative to the number of young workers. More capital per worker would mean higher worker productivity, higher real wages, and the lower return to capital that worries Wall Street. It would also mean a bigger payroll tax base and a smaller rise in tax rates. On the other hand, a higher payroll tax will leave workers with less after-tax income out of which to save and, therefore, fewer retirement assets than would otherwise be the case. Thus capital deepening is not a foregone conclusion. This study develops a dynamic general equilibrium life-cycle simulation model to study these conflicting forces. The model is the first of its kind to admit realistic patterns of fertility and lifespan extension. It also features heterogeneity, within as well as across generations, and, thus, can be used to study both intra- and intergenerational equity. Unfortunately, our baseline demographic simulation, which assumes the continuation of current social security policy, shows deteriorating macroeconomic conditions that will exacerbate, rather than mitigate, our fiscal problems. Real wages per effective unit of labor fall 4 percent over the next 30 years and 10 percent over the century. For Wall Street, this bad news about real wages is good news about the real return on capital, which rises 100 basis points by 2030 and 300 basis points by 2100. The model's gradual capital shallowing reflects the concomitant major rise in tax rates. In 2030, payroll tax rates and average income-tax rates applied to wages are 77 and 9 percent higher, respectively, than in 2000. Together, these tax hikes raise

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w8258.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8258.

as in new window
Length:
Date of creation: Apr 2001
Date of revision:
Handle: RePEc:nbr:nberwo:8258

Note: AG PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
  2. Bohn, Henning, 1999. "Will social security and Medicare remain viable as the U.S. population is aging?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 1-53, June.
  3. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
  4. Ziliak, J. & Kniesner, T.J., 1995. "Estimating life-cycle labor supply tax effects," Discussion Paper 1995-89, Tilburg University, Center for Economic Research.
  5. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  6. Laitner, John, 1984. "Transition time paths for overlapping-generations models," Journal of Economic Dynamics and Control, Elsevier, vol. 7(2), pages 111-129, May.
  7. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  8. Bernd Raffelhüschen, 1993. "Funding social security through Pareto-optimal conversion policies," Journal of Economics, Springer, vol. 58(1), pages 105-131, December.
  9. Kenneth A. Lewis & Laurence S. Seidman, 2002. "Funding Social Security: The Transition in a Life-Cycle Growth Model," Eastern Economic Journal, Eastern Economic Association, vol. 28(2), pages 159-180, Spring.
  10. Casey B. Mulligan, 1998. "Substitution over Time: Another Look at Life Cycle Labor Supply," NBER Working Papers 6585, National Bureau of Economic Research, Inc.
  11. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
  12. Martin Feldstein & Andrew Samwick, 1996. "The Transition Path in Privatizing Social Security," NBER Working Papers 5761, National Bureau of Economic Research, Inc.
  13. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  14. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  15. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  16. Bernd Raffelhüschen, 1993. "Funding social security through Pareto-optimal conversion policies," Journal of Economics, Springer, vol. 7(1), pages 105-131, December.
  17. HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
  18. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2002. "Long-Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 149-206 National Bureau of Economic Research, Inc.
  19. Klaus Schmidt-Hebbel, 1997. "Pension Reform, Informal Markets and Long-Term Income and Welfare," Working Papers Central Bank of Chile 04, Central Bank of Chile.
  20. Hansson, Ingemar & Stuart, Charles, 1989. "Social Security as Trade among Living Generations," American Economic Review, American Economic Association, vol. 79(5), pages 1182-95, December.
  21. Mark Huggett & Gustavo Ventura, 1999. "On the Distributional Effects of Social Security Reform," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 498-531, July.
  22. Blundell, Richard & Meghir, Costas & Neves, Pedro, 1993. "Labour supply and intertemporal substitution," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 137-160, September.
  23. Kotlikoff, Laurence J, 1979. "Social Security and Equilibrium Capital Intensity," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 233-53, May.
  24. Martin Feldstein, 1997. "Transition to a Fully Funded Pension System: Five Economic Issues," NBER Working Papers 6149, National Bureau of Economic Research, Inc.
  25. Thomas Cooley & Jorge Soares, 1999. "Privatizing Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 731-755, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gerhard Glomm & Juergen Jung & Chung Tran, 2013. "Fiscal Austerity Measures: Spending Cuts vs. Tax Increases," Working Papers 2013-01, Towson University, Department of Economics, revised Aug 2013.
  2. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series 580, Research Institute of Industrial Economics.
  3. Maria Laura Alzua & Hernan Ruffo, 2011. "Effects of Argentina's Social Security Reform on Labor Markets and Poverty," Working Papers MPIA 2011-11, PEP-MPIA.
  4. Attanasio Orazio P. & Gianluca Violante, 1999. "Global Demographic Trends and Social Security Reform," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  5. Berkel, Barbara & Börsch-Supan, Axel H. & Ludwig, Alexander & Winter, Joachim, 2004. "Sind die Probleme der Bevölkerungsalterung durch eine höhere Geburtenrate lösbar?," Munich Reprints in Economics 20285, University of Munich, Department of Economics.
  6. Heinrich Jess, 2006. "Steuerfinanzierung von Sozialleistungen? Verteilungs- und Effizienzeffekte einer Umfinanzierung von Sozialleistungen in der gesetzlichen Renten- und Krankenversicherung," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 226(4), pages 436-462, July.
  7. Gerhard Glomm & Juergen Jung, 2010. "A Macroeconomic Analysis of the Fiscal System in Egypt," Working Papers 2010-17, Towson University, Department of Economics, revised Oct 2010.
  8. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2007. "Will China Eat Our Lunch or Take Us to Dinner? Simulating the Transition Paths of the United States, the European Union, Japan, and China," NBER Chapters, in: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16, pages 133-193 National Bureau of Economic Research, Inc.
  9. Marek Kapicka, 2006. "The Dynamics of Optimal Taxation when Human Capital is Endogenous," 2006 Meeting Papers 349, Society for Economic Dynamics.
  10. Holmøy, Erling & Strøm, Birger, 2013. "Computable General Equilibrium Assessments of Fiscal Sustainability in Norway," Handbook of Computable General Equilibrium Modeling, Elsevier.
  11. Jorgensen, Ole Hagen, 2013. "Efficiency and equity implications of oil windfalls in Brazil," Policy Research Working Paper Series 6597, The World Bank.
  12. Gerhard Glomm & Juergen Jung, 2012. "A Macroeconomic Analysis of Energy Subsidies in a Small Open Economy: The Case of Egypt," Caepr Working Papers 2012-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8258. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.