Optimal Pensions in Aging Economies
37 Pages Posted: 5 Feb 2015
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: Suggested Citation