Declining Natural Interest Rate in the US: The Pension System Matters

62 Pages Posted: 16 Apr 2021

See all articles by Jacopo Bonchi

Jacopo Bonchi

Luiss Guido Carli University

Giacomo Caracciolo

Bank of Italy

Date Written: February 12, 2021


The natural interest rate is the level of the real interest rate compatible with potential output and stable prices. We develop a life-cycle model and calibrate it to the US economy to quantify the role of the public pension scheme for the past and future evolution of the natural interest rate. Between 1970 and 2015, the pension reforms have overall mitigated the secular decline in the natural interest rate, raising it by around one percentage point and thus counteracting the downward pressure from adverse demographic and productivity patterns. As regards the future, we simulate the effects of the demographic trends, expected between 2015 and 2060, combined with alternative pension reforms and productivity growth scenarios. We rank the different policy options according to a welfare criterion and study the implications for the natural interest rate. A reduction in the replacement rate outperforms, in terms of welfare, an increase in the contribution rate in the “normal growth” scenario and vice versa in the “stagnant growth” case.

Keywords: natural interest rate, pensions, population ageing, secular stagnation, demography, social security

JEL Classification: E60, H55

Suggested Citation

Bonchi, Jacopo and Caracciolo, Giacomo, Declining Natural Interest Rate in the US: The Pension System Matters (February 12, 2021). Bank of Italy Temi di Discussione (Working Paper) No. 1317, Available at SSRN: or

Jacopo Bonchi

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100

Giacomo Caracciolo (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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