Should We Refinance Unfunded Social Security?

Abstract

Within a continuous-time overlapping generations model, featuring endogenous intensive margin of the labour supply and retirement decision, we analyse the issue of passing the burden of payroll revenues onto consumption or capital. We find that large long-run welfare gains occur when pension benefits are refinanced by consumption taxes. However, the transition to the new steady state is very painful for a large fraction of existing cohorts. On the other hand, the capital base is too small to sustain pension benefits but could be made larger if capital taxes are raised. Yet that would entail significant welfare losses.

A tale of two taxes: State‐dependency of tax policy

“…To see this, consider, for example, the case in which = 0.93, = 1.5, 1 − = 0.10, = 4.1, and A = 2.2. Then, the hours worked (L) are about 0.325, which is consistent with Turnovsky (2000), Chang and Schorfheide (2003), Tang (2013), andHeer (2019). The long-term growth rate = 2.46 %, which falls in the range of estimates reported by Scarpetta et al (2000), Potrafke (2012), and Alinaghi and Reed (2020).…”

Public pension policy and the equity–efficiency trade‐off∗

“…A capital–output ratio within the interval of 2.9 and 3.1 is standard (Gahramanov and Tang, 2013), and will be targeted likewise. By setting , which is also standard, the model output is intermediate to this interval.…”

“…The target interval for the equilibrium interest rate is wide. Gahramanov and Tang (2013) considers the Feldstein (1995) estimate of pre‐tax rate of return on corporate capital investment of 10 percent as an upper limit. Meanwhile, Barro et al (1995) targets 6 percent, and Caliendo and Findley (2020) targets 2 percent.…”

Labor-Leisure Choice: Is Everything as Straightforward as One Might Have Thought?

“…The study of [19] analyzes the macroeconomic and welfare effects of ending mandatory retirement within a life-cycle environment where lifetime is divided between working and retirement periods. In general, studies that use a similar labor supply structure in analyzing important issues, such as pension reforms, taxation, aging, and fertility, or studies that assume a clear career interruption channel are not scant (see, e.g., [20]- [22]).…”