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The B.E. Journal of Macroeconomics

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Optimal pensions in aging economies

Burkhard Heer
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  • University of Augsburg, Department of Economics, Universitatsstraße 16, 86159 Augsburg, Germany
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Published Online: 2017-08-18 | DOI: https://doi.org/10.1515/bejm-2015-0166


We derive the optimal replacement ratio of the pay-as-you-go public pension system for the US economy in a life-cycle model that 1) replicates the empirical wage heterogeneity and 2) endogenizes the individual’s labor supply decision. The optimal net pension replacement ratio is found to be in the range of 0%–43% depending on demographic parameters and, in particular, the Frisch labor supply elasticity. Reducing the pensions from the present to the optimal pension policies implies considerable welfare gains amounting to approximately 0.1%–4.1% of total consumption. The welfare increase is particularly pronounced for the greyer US population that is projected for the time after the demographic transition.

Keywords: demographic transition; income and wealth distribution; optimal social security

JEL Classification: C68; D31; D91; H55; J11; J26


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About the article

Published Online: 2017-08-18

Citation Information: The B.E. Journal of Macroeconomics, Volume 18, Issue 1, 20150166, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2015-0166.

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