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Optimal response to a transitory demographic shock in Social Security financing

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  • Juan Carlos Conesa
  • Carlos Garriga

Abstract

We examine the optimal policy response to a transitory demographic shock that affects negatively the financing of retirement pensions. In contrast to existing literature, we endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach identifies optimal strategies of the social security administration to guarantee the financial sustainability of existing retirement pensions in a Pareto improving way. Hence, no cohort will pay the cost of the demographic shock. We find that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.

Suggested Citation

  • Juan Carlos Conesa & Carlos Garriga, 2007. "Optimal response to a transitory demographic shock in Social Security financing," Working Papers 2007-041, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2007-041
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    Cited by:

    1. Yigit Aydede, 2010. "Generational selfishness and social security: a time‐inconsistency problem in parametric reforms of PAYG," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 13(2), pages 179-190.
    2. Bagchi Shantanu, 2017. "Can removing the tax cap save Social Security?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-28, June.
    3. Bagchi, Shantanu, 2019. "Differential mortality and the progressivity of social security," Journal of Public Economics, Elsevier, vol. 177(C), pages 1-1.
    4. Georges Casamatta & L. Batté, 2016. "The Political Economy of Population Aging," Post-Print hal-02520521, HAL.
    5. Shantanu Bagchi, 2023. "Means Testing and Social Security in the U.S," Working Papers 2023-01, Towson University, Department of Economics, revised Mar 2023.
    6. Yigit Aydede, 2010. "Generational selfishness and social security: a time-inconsistency problem in parametric reforms of PAYG," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 13(2), pages 179-190.
    7. Craig P. Aubuchon & Juan Carlos Conesa & Carlos Garriga, 2011. "A primer on social security systems and reforms," Review, Federal Reserve Bank of St. Louis, vol. 93(Jan), pages 19-35.
    8. Casamatta, G. & Batté, L., 2016. "The Political Economy of Population Aging," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 381-444, Elsevier.

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    Keywords

    Social security; Pensions;

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