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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 is financing retirement consumption as its population ages. Proposals for switching to a saving-for-retirement system that do not rely on high payroll taxes have been challenged on the grounds that welfare for some cohorts will fall. 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 cohorts, with estimates of future gains that are twice as large as those found with typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Furthermore, the gains are amplified if we lower capital taxes in addition to payroll taxes because the value of business equity increases relative to the capital stock. 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, 2013. "On Financing Retirement with an Aging Population," NBER Working Papers 18760, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18760
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    Cited by:

    1. Marcin Waniek & Krzysztof Makarski & Joanna Tyrowicz & Marcin Bielecki, 2017. "Inequality in an OLG Economy with Heterogeneous Cohorts and Pension Systems," 2017 Meeting Papers 958, Society for Economic Dynamics.
    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. 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. Prescott, Edward C. & Wessel, Ryan, 2018. "Money in the Production Function," Staff Report 562, Federal Reserve Bank of Minneapolis.
    7. Paul Klein & Gustavo Ventura, 2018. "Taxation, Expenditures and the Irish Miracle," 2018 Meeting Papers 282, Society for Economic Dynamics.
    8. Kathleen McKiernan, 2018. "Welfare Impact of Social Security Reform: The Case of Chile in 1981," 2018 Meeting Papers 253, Society for Economic Dynamics.
    9. 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.
    10. repec:sgh:gosnar:y:2017:i:4:p:63-81 is not listed on IDEAS

    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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