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On financing retirement with an aging population

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

A problem facing the United States and many other countries is how to finance retirement consumption as the number of their workers per retiree falls. Policy analysts are increasingly advocating a move to a savings-for-retirement system. An apparent problem with this move is the shortage of good savings opportunities given the limited ability of government to honor its debt. We find that there is no problem because there is much more productive capital than commonly assumed in macroeconomic modeling. We also find that eliminating capital income taxes will greatly increase savings opportunities and make a savings-for-retirement system feasible with only a modest amount of government debt. The tax policy changes we consider are phased in smoothly and are relatively modest. The switch from a system close to the current U.S. retirement system, which relies heavily on taxing workers’ incomes and making lump-sum transfers to retirees, to one without capital income taxes will increase the welfare of all birth-year cohorts alive today and particularly the welfare of the yet unborn cohorts.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2012. "On financing retirement with an aging population," Staff Report 472, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:472
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Hosseini, Roozbeh & Shourideh, Ali, 2016. "Retirement Financing: An Optimal Reform Approach," MPRA Paper 71613, University Library of Munich, Germany, revised 19 Jan 2016.
    4. 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.
    5. Andreas Bachmann & Kaspar Wüthrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1310, Universitaet Bern, Departement Volkswirtschaft.
    6. 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.
    7. repec:sgh:gosnar:y:2017:i:4:p:63-81 is not listed on IDEAS
    8. Andreas Bachmann & Kaspar Wüthrich, 2015. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1507, Universitaet Bern, Departement Volkswirtschaft.

    More about this item

    Keywords

    Debt - United States ; Taxation;

    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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