Optimal Pensions in Aging Economies

37 Pages Posted: 5 Feb 2015

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 31, 2015

Abstract

İmrohoroğlu, İmrohoroğlu and Joines [1995, A life-cycle analysis of Social Security, Economic Theory, vol. 6, 83-114] show that the optimal replacement ratio of the pay-as-you-go public pension system in the US economy amounts to 30%. We extend their analysis to a model that 1) replicates the empirical wage heterogeneity, 2) endogenizes the individual’s labor supply decision and 3) accounts for contributions-defined pensions of the US social security system. With these more realistic modifications, the optimal replacement ratio is found to amount to approximately 5% and to be insensitive with regard to the aging of the US population; however, lower productivity growth would result in higher optimal pension payments. In addition, the optimal pension scheme is found to be more progressive than the present US pension system.

Keywords: optimal social security, progressive pensions, income and wealth distribution, demographic transition

JEL Classification: C680, D310, D910, H550, J110, J260

Suggested Citation

Heer, Burkhard, Optimal Pensions in Aging Economies (January 31, 2015). CESifo Working Paper Series No. 5192, Available at SSRN: https://ssrn.com/abstract=2560753 or http://dx.doi.org/10.2139/ssrn.2560753

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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