Quantitative Economics: Mar, 2017, Volume 8, Issue 1

On financing retirement with an aging population

Ellen R. McGrattan, Edward C. Prescott

A problem that faces many countries including the United States is how to finance retirement consumption as the population ages. Proposals for switching to a saving‐for‐retirement system that does not rely on high payroll taxes have been challenged on the grounds that welfare would fall for some groups such as retirees or the working poor. We show how to devise a transition path from the current U.S. system to a saving‐for‐retirement system that increases the welfare of all current and future generations, with estimates of future gains higher than those found in typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income‐weighted average marginal tax rates used in our analysis.

Retirement taxation Social Security Medicare E13 H55 I13

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