Optimal pensions in aging economies

Burkhard Heer

The B.E. Journal of Macroeconomics, 2018, vol. 18, issue 1, 19

Abstract: We derive the optimal replacement ratio of the pay-as-you-go public pension system for the US economy in a life-cycle model that 1) replicates the empirical wage heterogeneity and 2) endogenizes the individual’s labor supply decision. The optimal net pension replacement ratio is found to be in the range of 0%–43% depending on demographic parameters and, in particular, the Frisch labor supply elasticity. Reducing the pensions from the present to the optimal pension policies implies considerable welfare gains amounting to approximately 0.1%–4.1% of total consumption. The welfare increase is particularly pronounced for the greyer US population that is projected for the time after the demographic transition.

Keywords: demographic transition; income and wealth distribution; optimal social security (search for similar items in EconPapers)
JEL-codes: C68 D31 D91 H55 J11 J26 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Working Paper: Optimal Pensions in Aging Economies (2015)
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DOI: 10.1515/bejm-2015-0166

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