Sustainable Social Security: Four Options
Federal Reserve Banks - Federal Reserve Bank of New York
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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