On efficiently financing retirement

Ellen McGrattan and Edward Prescott

No 692, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: A problem facing the United States and many other countries is how to finance retirement consumption as the number of their workers per retiree falls. The problem with a savings for retirement systems is that there is a shortage of good savings opportunities given the nature of most current tax systems and governments? limited ability to honor the debt it issues. We find that eliminating capital income taxes will greatly increase saving opportunities and make a savings-for-retirement system feasible with only modest amount of government debt. The switch from a system close to the current U.S. retirement system, which relies heavily on taxing workers? incomes and making lump-sum transfers to retirees, to one without income taxes will increase the welfare of all birth-year cohorts alive today and particularly the welfare of the yet unborn cohorts. The equilibrium paths for the current and alternative policies are computed.

Date: 2011
New Economics Papers: this item is included in nep-age and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:692

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