IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/505.html
   My bibliography  Save this paper

Sustainable social security: four options

Author

Listed:
  • Sagiri Kitao

Abstract

This paper presents four policy options to make Social Security sustainable under the coming demographic shift: 1) increase payroll taxes by 6 percentage points, 2) reduce the replacement rates of the benefit formula by one-third, 3) raise the normal retirement age from sixty-six to seventy-three, or 4) means-test the benefits and reduce them one-to-one with income. While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means-testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.

Suggested Citation

  • Sagiri Kitao, 2011. "Sustainable social security: four options," Staff Reports 505, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:505
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr505.html
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr505.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daniel Aaronson & Eric French, 2004. "The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 329-352, April.
    2. Wojciech Kopczuk & Joseph P. Lupton, 2007. "To Leave or Not to Leave: The Distribution of Bequest Motives," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 207-235.
    3. Tran, Chung & Woodland, Alan, 2014. "Trade-offs in means tested pension design," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 72-93.
    4. Laurence J. Kotlikoff & Kent Smetters & Jan Walliser, 1999. "Privatizing Social Security in the U.S. -- Comparing the Options," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 532-574, July.
    5. Shinichi Nishiyama & Kent Smetters, 2007. "Does Social Security Privatization Produce Efficiency Gains?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1677-1719.
    6. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, February.
    7. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, May.
    8. Browning, Martin & Hansen, Lars Peter & Heckman, James J., 1999. "Micro data and general equilibrium models," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 8, pages 543-633, Elsevier.
    9. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
    10. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(2), pages 395-427.
    11. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2010. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 681-722, August.
    12. Javier Diaz-Gimenez & Julian Diaz-Saavedra, 2009. "Delaying Retirement in Spain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 147-167, January.
    13. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, April.
    14. James Sefton & Justin Van De Ven & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, April.
    15. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
    16. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    17. Imrohoroglu, Selahattin & Kitao, Sagiri, 2009. "Labor supply elasticity and social security reform," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 867-878, August.
    18. Kotlikoff, Laurence J. & Smetters, Kent & Walliser, Jan, 2007. "Mitigating America's demographic dilemma by pre-funding social security," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 247-266, March.
    19. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    20. Selahattin Imrohoroglu & Sagiri Kitao, 2012. "Social Security Reforms: Benefit Claiming, Labor Force Participation, and Long-Run Sustainability," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 96-127, July.
    21. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," 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 713-780, Elsevier.
    2. Tomoaki Kotera, 2020. "Sustainability of Social Security in the Aging Economy from the Perspective of Improving Health," IMES Discussion Paper Series 20-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Masayuki Okada, 2023. "The optimal earnings test and retirement behavior," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(4), pages 1036-1068, August.
    4. Selahattin Imrohoroglu & Sagiri Kitao, 2010. "Social Security, Benefit Claiming and Labor Force Participation: A Quantitative General Equilibrium Approach," Working Papers, Center for Retirement Research at Boston College wp2010-02, Center for Retirement Research, revised Mar 2010.
    5. Jones, John Bailey & Li, Yue, 2018. "The effects of collecting income taxes on Social Security benefits," Journal of Public Economics, Elsevier, vol. 159(C), pages 128-145.
    6. Kitao, Sagiri, 2015. "Fiscal cost of demographic transition in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 37-58.
    7. Eric French & John Jones, 2012. "Public pensions and labor supply over the life cycle," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(2), pages 268-287, April.
    8. 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.
    9. Erin Cottle Hunt & Frank N. Caliendo, 2020. "Social Security reform: three Rawlsian options," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1582-1607, December.
    10. Li, Yue, 2018. "Paradoxical effects of increasing the normal retirement age: A prospective evaluation," European Economic Review, Elsevier, vol. 101(C), pages 512-527.
    11. Erin Cottle Hunt & Frank N. Caliendo, 2022. "Social security and risk sharing: A survey of four decades of economic analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1591-1609, December.
    12. Bagchi, Shantanu, 2019. "Differential mortality and the progressivity of social security," Journal of Public Economics, Elsevier, vol. 177(C), pages 1-1.
    13. Minchung Hsu & Tomoaki Yamada, 2019. "Population Aging, Health Care, and Fiscal Policy Reform: The Challenges for Japan," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 547-577, April.
    14. Börsch-Supan, A. & Härtl, K. & Leite, D.N., 2016. "Social Security and Public Insurance," 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 781-863, Elsevier.
    15. Conesa, Juan Carlos & Kehoe, Timothy J. & Nygaard, Vegard M. & Raveendranathan, Gajendran, 2020. "Implications of increasing college attainment for aging in general equilibrium," European Economic Review, Elsevier, vol. 122(C).
    16. Fehr, Hans & Jokisch, Sabine & Kallweit, Manuel & Kindermann, Fabian & Kotlikoff, Laurence J., 2013. "Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1719-1800, Elsevier.
    17. Cormac O'Dea, 2018. "Insurance, Efficiency and the Design of Public Pensions," 2018 Meeting Papers 1037, Society for Economic Dynamics.
    18. Attanasio, O. & Bonfatti, A. & Kitao, S. & Weber, G., 2016. "Global Demographic Trends," 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 179-235, Elsevier.
    19. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," 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 457-566, Elsevier.
    20. Heer, Burkhard & Polito, Vito & Wickens, Michael R., 2020. "Population aging, social security and fiscal limits," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).

    More about this item

    Keywords

    Social security; Demography; Retirement; Payroll tax; Labor market; Employee fringe benefits;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:505. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.