Staff Reports
Sustainable Social Security: Four Options
July 2011 Number 505
JEL classification: E2, E60, H55, J20

Author: Sagiri Kitao

This paper presents four policy options to make Social Security sustainable under the coming demographic shift: 1) increase payroll taxes by 6 percentage points, 2) reduce the replacement rates of the benefit formula by one-third, 3) raise the normal retirement age from sixty-six to seventy-three, or 4) means-test the benefits and reduce them one-to-one with income. While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means-testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.

Available only in PDF pdf  32 pages / 271 kb
For a published version of this report, see Sagiri Kitao, "Sustainable Social Security: Four Options," Review of Economic Dynamics 17, no. 4 (October 2014): 756-79.
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