On Financing Retirement with an Aging Population

49 Pages Posted: 2 Feb 2013

See all articles by Ellen McGrattan

Ellen McGrattan

University of Minnesota - Minneapolis

Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

Edward C. Prescott

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Date Written: February 2013

Abstract

A problem facing the United States is financing retirement consumption as its population ages. Proposals for switching to a saving-for-retirement system that do not rely on high payroll taxes have been challenged on the grounds that welfare for some cohorts will fall. We show how to devise a transition path from the current U.S. system to a saving-for-retirement system that increases the welfare of all current and future cohorts, with estimates of future gains that are twice as large as those found with typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Furthermore, the gains are amplified if we lower capital taxes in addition to payroll taxes because the value of business equity increases relative to the capital stock. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income-weighted average marginal tax rates used in our analysis.

Suggested Citation

McGrattan, Ellen and McGrattan, Ellen R. and Prescott, Edward C., On Financing Retirement with an Aging Population (February 2013). NBER Working Paper No. w18760, Available at SSRN: https://ssrn.com/abstract=2210779

Ellen McGrattan (Contact Author)

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-340-2587 (Phone)
612-340-2356 (Fax)

University of Minnesota - Twin Cities

420 Delaware St. SE
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Edward C. Prescott

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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