Sustainable Social Security: Four Options
32 Pages Posted: 10 Aug 2011
Date Written: July 1, 2011
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.
Keywords: social security reform and sustainability, general equilibrium, labor force participation, retirement age, demographic shift, overlapping generations
JEL Classification: E2, E60, H55, J20
Suggested Citation: Suggested Citation