Optimal Response to a Transitory Demographic Shock in Social Security Financing [report]

Juan Carlos Conesa, Carlos Garriga
2007 unpublished
The authors consider a transitory demographic shock that affects negatively the financing of retirement pensions-that is, workers either would have to pay more or retirees would receive less. In contrast to the existing literature, the authors endogenously determine optimal policies rather than explore the implications of exogenous parametric responses. Their approach identifies optimal strategies of the Social Security Administration to guarantee the financial sustainability of existing
more » ... of existing retirement pensions in a Pareto-improving way. Hence, no cohort will pay the cost of the demographic shock. The authors find that the optimal strategy is based on the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation, and a temporary increase in the level of government debt. ( JEL D58, D91, H55) Federal Reserve Bank of St. Louis Review, January/February 2009, 91(1), pp. 33-48. financing of retirement pensions. 1 In contrast to existing literature, we follow an approach that is similar to that used in Conesa and Garriga (2008) and endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach determines the optimal strategy of the Social Security Administration to guarantee the financial sustainability of current retirement pensions in the least distortionary way. Moreover, no cohort will have to pay the welfare cost of the demographic shock. Notice that we are concerned only about efficiency considerations in the financing of retirement pensions rather than about the efficiency of their existence in the first place. Their existence
doi:10.20955/wp.2007.041 fatcat:xj6aky65irgwxpiuw2nfpqrqou