Sustainable Social Security: Four Options

32 Pages Posted: 10 Aug 2011

See all articles by Sagiri Kitao

Sagiri Kitao

City University of New York, CUNY Hunter College - Department of Economics

Date Written: July 1, 2011

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.

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

Kitao, Sagiri, Sustainable Social Security: Four Options (July 1, 2011). FRB of New York Staff Report No. 505, Available at SSRN: https://ssrn.com/abstract=1906742 or http://dx.doi.org/10.2139/ssrn.1906742

Sagiri Kitao (Contact Author)

City University of New York, CUNY Hunter College - Department of Economics ( email )

695 Park Avenue
New York, NY 10021
United States

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