Retirement Financing: An Optimal Reform Approach

Roozbeh Hosseini and Ali Shourideh

MPRA Paper from University Library of Munich, Germany

Abstract: We study policy reforms aimed at overhauling retirement financing. We develop a novel approach by considering optimal reforms: policy reforms that minimize the cost for the government while respecting the distribution of welfare in the economy. Our model is an OLG model with life-cycle features and bequest motives where individuals are heterogeneous in their earning ability and mortality. Theoretically, we show that due to the negative correlation between earnings ability and mortality, postretirement distortions to saving decisions are a robust feature of any optimal policy. We, then, use this framework to quantitatively analyze optimal reforms. Our quantitative exercise shows that an optimal reform relative to the status-quo must have three key features: First, post-retirement assets must be subsidized while bequests must be taxed. On average, optimal marginal subsidies on assets for individuals above age 65 is 3.2 percent, while optimal marginal tax on their bequest is 60 percent. Second, pre-retirement transfers must increase while social security benefits must become less generous in the aggregate and more progressive towards low income groups. Finally, earnings tax reform does not contribute to optimal reforms, i.e., optimal marginal taxes on earnings remain very close to the status-quo. The optimal policies reduce the present discounted value of net tax and transfers to each generation by 15 percent.

Keywords: Retirement; Optimal Taxation; Social Security (search for similar items in EconPapers)
JEL-codes: E6 H21 H55 (search for similar items in EconPapers)
Date: 2016-01-19, Revised 2016-01-19
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://mpra.ub.uni-muenchen.de/71613/2/retire_reform.pdfretire_reform.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/76695/2/retire_reform.pdfretire_reform.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/76695/10/MPRA_paper_76695.pdf revised version (application/pdf)

Related works:
Journal Article: Retirement Financing: An Optimal Reform Approach (2019)
Working Paper: Retirement Financing: An Optimal Reform Approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:71613

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