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On financing retirement with an aging population

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

A problem that faces many countries including the United States is how to finance retirement consumption as the population ages. Proposals for switching to a saving‐for‐retirement system that does not rely on high payroll taxes have been challenged on the grounds that welfare would fall for some groups such as retirees or the working poor. We show how to devise a transition path from the current U.S. system to a saving‐for‐retirement system that increases the welfare of all current and future generations, with estimates of future gains higher than those found in typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income‐weighted average marginal tax rates used in our analysis.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2017. "On financing retirement with an aging population," Quantitative Economics, Econometric Society, vol. 8(1), pages 75-115, March.
  • Handle: RePEc:wly:quante:v:8:y:2017:i:1:p:75-115
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    Cited by:

    1. Marcin Bielecki & Joanna Tyrowicz & Krzysztof Makarski & Marcin Waniek, 2015. "Inequalities in an OLG economy with heterogeneity within cohorts and pension systems," Working Papers 2015-16, Faculty of Economic Sciences, University of Warsaw.
    2. R. Anton Braun & Karen A. Kopecky & Tatyana Koreshkova, 2017. "Old, Sick, Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programmes," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 580-612.
    3. Krzysztof Makarski & Joanna Tyrowicz & Marcin Bielecki, 2017. "Inequality in an OLG economy with heterogeneous cohorts and pension systems," GRAPE Working Papers 21, GRAPE Group for Research in Applied Economics.
    4. Hosseini, Roozbeh & Shourideh, Ali, 2016. "Retirement Financing: An Optimal Reform Approach," MPRA Paper 71613, University Library of Munich, Germany, revised 19 Jan 2016.
    5. repec:sgh:gosnar:y:2017:i:4:p:63-81 is not listed on IDEAS
    6. Bielecki, Marcin & Goraus, Karolina & Hagemejer, Jan & Makarski, Krzysztof & Tyrowicz, Joanna, 2015. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Economic Modelling, Elsevier, vol. 48(C), pages 210-221.
    7. Andreas Bachmann & Kaspar Wüthrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1310, Universitaet Bern, Departement Volkswirtschaft.
    8. Prescott, Edward C. & Wessel, Ryan, 2018. "Money in the Production Function," Staff Report 562, Federal Reserve Bank of Minneapolis.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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