Ensuring the Sustainability of the U.S. Pay-As-You-Go System *

Xavier Fairise, Jhon Jair Gonzalez-Pulgarin, François Langot () and Alexandre Popier
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Xavier Fairise: GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université
Jhon Jair Gonzalez-Pulgarin: CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres
François Langot: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres
Alexandre Popier: LMM - Laboratoire Manceau de Mathématiques - UM - Le Mans Université

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Abstract: We propose a heterogeneous agent model to explore the sustainability of the Pay-As-You-Go (PAYG) pension system in the context of an aging population and an evolving educational system. We also evaluate its implications for wealth distribution. We analyze optimal reform strategies including potential adjustments to income tax rates, pension levels, and retirement age. Our results indicate that a 5-year increase in lifespan requires either a 7 percentage point increase in tax rates or an 18 percentage point reduction in the pension replacement ratio. Without an increase in educational attainment, U.S. GDP would stagnate at 2020 levels. Adjusting the system through pension reductions requires greater savings and leads to lower labor supply distortions. Furthermore, adjusting the PAYG system through changes in the retirement age yields the highest GDP increase among the measures considered. In terms of wealth inequalities, these increase with tax hikes and pension reductions, with the most significant rise occurring when adjusting through a higher retirement age. Regarding welfare, the positive impact of increased education is outweighed by the negative effects of lifespan extension. Finally, postponing the retirement age leads to the smallest reduction in retirees' welfare but also reduces the insurance needs of young people.

Keywords: wealth inequality; pensions; income tax; aging; education; heterogeneous agents (search for similar items in EconPapers)
Date: 2025-04-03
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