On Financing Retirement with an Aging Population

Ellen McGrattan and Edward Prescott

No 18760, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E20 G18 H21 H61 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-age, nep-dem, nep-dge and nep-mac
Note: EFG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Ellen R. McGrattan & Edward C. Prescott, 2017. "On financing retirement with an aging population," Quantitative Economics, vol 8(1), pages 75-115.

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Working Paper: On Financing Retirement with an Aging Population (2013)
Working Paper: On financing retirement with an aging population (2012)
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