Abstract
Without policy reforms, the aging of the U.S. population is likely to increase the burden of the currently unfunded Social Security and Medicare systems. In this paper we build an applied general equilibrium model and incorporate the population projections made by the Social Security Administration (SSA) to evaluate the macroeconomic and welfare implications of alternative fiscal responses to the retirement of the baby-boomers. Our calculations suggest that it will be costly to maintain the benefits at the levels now promised because the increases in distortionary taxes required to finance those benefits will reduce private saving and labor supply. We also find that the "accounting calculations" made by the SSA underestimate the required fiscal adjustments. Finally, our results confirm that policies with similar long-run characteristics have very different transitional implications for the distribution of welfare across generations. Journal of Economic Literature Classification Numbers: D52, D58, E21, E62.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 575-615 |
| Number of pages | 41 |
| Journal | Review of Economic Dynamics |
| Volume | 2 |
| Issue number | 3 |
| DOIs | |
| State | Published - Jul 1999 |
| Externally published | Yes |
Bibliographical note
Funding Information:Without policy reforms, the aging of the U.S. population is likely to increase the burden of the currently unfunded Social Security and Medicare systems. In this paper we build an applied general equilibrium model and incorporate the population projections made by the Social Security Administration (SSA) to evaluate the macroeconomic and welfare implications of alternative fiscal responses to the retirement of the baby-boomers. Our calculations suggest that it will be costly to maintain the benefits at the levels now promised because the increases in distortionary taxes required to finance those benefits will reduce private saving and labor supply. We also find that the "accounting calculations" made by the SSA underestimate the required fiscal adjustments. Finally, our results confirm that policies with similar long-run characteristics have very different transitional implications for the distri~ bution of welfare across generations. Journal of Economic Literature Classification Numbers: D52, D58, E21, E62. © 1999A cademicP ress * For comments, we thank the audiences for presentations of drafts of this paper at the Federal Reserve Macro System Committee Meeting, the University of Minnesota, the London School of Economics, and the Universitat Pompeu Fabra. We also thank Andrew Abel, Marco Bassetto, Randall P. Mariger, Frangois Velde, and an anonymous referee associated with this journal. Neither the Federal Reserve Bank of Chicago nor the Federal Reserve System is responsible for the views expressed in this paper. Thomas J. Sargent acknowledges support from the National Science Foundation.
