We develop an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of increasing college attainment, decreasing fertility, and increasing longevity (2005–2100). While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 33.5 to 47.1%. Increasing college attainment lowers the required tax increase by 12.0 percentage points. The labor tax rate required to balance the government budget is higher under general equilibrium than in a small open economy with a constant interest rate, because the reduction in the interest rate lowers capital income tax revenues.
Bibliographical noteFunding Information:
This project was supported by the National Institutes of Health (NIH Grant No. 5R01AG048037-02). We thank the editor, Michael Keane, two referees, and seminar participants at the Atlanta Workshop on International Economics at Emory University, especially our discussant, Mariacristina De Nardi, the Barcelona GSE Summer Forum, the Winter Macroeconomics Workshop in Bellaterra, the Institute for Fiscal Studies, ITAM, McMaster University, the NBER Summer Institute, NYU, the SAEe in Barcelona, the SAET in Ischia, Santa Barbara, the SED in Mexico City, the Universidade Cat?lica de Brasilia, and the Universidad Torcuto di Tella for helpful discussions and suggestions. We thank Daniela Costa, Parisa Kamali, and Akshar Saxena for their help during an early stage of the paper. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research.
- College attainment
- General equilibrium
- Health care
PubMed: MeSH publication types
- Journal Article