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Declining r∗ in the US: The role of Social Security

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  • Bonchi, Jacopo
  • Caracciolo, Giacomo

Abstract

We develop a quantitative life-cycle model to study the impact of Social Security on the US natural interest rate, r∗. Past reforms mitigated the r∗ decline, raising the natural rate by approximately 1 percentage point between 1970 and 2015 through higher replacement rate and retirement age. In the future, increasing the retirement age would counteract the downward pressure on r∗ due to demographics more than reforms entailing higher contribution or lower replacement rates, with the latter reform delivering the lowest r∗ value across different future productivity scenarios for the US economy.

Suggested Citation

  • Bonchi, Jacopo & Caracciolo, Giacomo, 2025. "Declining r∗ in the US: The role of Social Security," Journal of Public Economics, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:pubeco:v:241:y:2025:i:c:s0047272724002135
    DOI: 10.1016/j.jpubeco.2024.105277
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