Optimal pensions in aging economies

  • 1 University of Augsburg, Department of Economics, Universitatsstraße 16, 86159 Augsburg, Germany
Burkhard Heer
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  • University of Augsburg, Department of Economics, Universitatsstraße 16, 86159 Augsburg, Germany
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Abstract

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.

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The B.E. Journal of Macroeconomics publishes significant research and scholarship in theoretical and applied macroeconomics. The range of topics includes business cycle research, economic growth, and monetary economics, as well as topics drawn from the substantial areas of overlap between macroeconomics and international economics, labor economics, finance, development economics, political economy, public economics, econometric theory.

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