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Policy Uncertainty and Cost of Delaying Reform: The Case of Aging Japan

Sagiri Kitao ()

Review of Economic Dynamics, 2018, vol. 27, 81-100

Abstract: Reform is inevitable in an aging economy with a generous pay-as-you-go social security system. Often, however, the timing and structure of reform are unknown. We explicitly model policy uncertainty in a general equilibrium life-cycle model and let agents update expectations and react as uncertainty is resolved over time. Using the case of Japan, a country facing severe demographic and fiscal challenges, we quantify welfare tradeoff across generations by delaying reform or reducing its scope. Individuals respond to a delay by dis-saving and working less, while facing higher taxes to cover additional expenditures during the transition. Fiscal uncertainty itself has a more significant adverse effect on older individuals, who face greater income risks and a lower return on their retirement savings. (Copyright: Elsevier)

Keywords: Pension reform; policy uncertainty; aging demographics; fiscal sustainability; Japanese economy (search for similar items in EconPapers)
JEL-codes: E20 H55 J11 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.red.2017.11.005

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