Sustainable Social Security: Four Options
City University of New York, CUNY Hunter College - Department of Economics
July 1, 2011
FRB of New York Staff Report No. 505
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.
Number of Pages in PDF File: 32
Keywords: social security reform and sustainability, general equilibrium, labor force participation, retirement age, demographic shift, overlapping generations
JEL Classification: E2, E60, H55, J20working papers series
Date posted: August 10, 2011
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