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Simulating the Response to Reform of Canada's Income Security Programs

Author

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  • Michael Baker
  • Jonathan Gruber
  • Kevin Milligan

Abstract

We explore the fiscal implications of reforms to the Canadian retirement income system by decomposing the fiscal effect of reforms into two components. The mechanical effect captures the change in the government's budget assuming no behavioral response to the reform. The second component is the fiscal implication of the behavioral effect, which captures the influence of any induced changes in elderly labor supply on government budgets. We find that the behavioral response can account for up to half of the total impact of reform on government budgets. The behavioral response affects government budgets not only in the retirement income system but also through increased income, payroll, and consumption tax revenue on any induced labor market earnings among the elderly. We show that fully accounting for the behavioral response to reforms can change the cost estimates and distributive impact of retirement income reforms.

Suggested Citation

  • Michael Baker & Jonathan Gruber & Kevin Milligan, 2003. "Simulating the Response to Reform of Canada's Income Security Programs," NBER Working Papers 9455, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9455
    Note: AG LS PE
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    References listed on IDEAS

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    1. Michael Baker, 2002. "The Retirement Behavior of Married Couples: Evidence from the Spouse's Allowance," Journal of Human Resources, University of Wisconsin Press, vol. 37(1), pages 1-34.
    2. Kevin Milligan, 2002. "Tax-preferred savings accounts and marginal tax rates: evidence on RRSP participation," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 436-456, August.
    3. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1.
    4. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-1180, September.
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    JEL classification:

    • H0 - Public Economics - - General

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