Working Paper

Optimal response to a transitory demographic shock in Social Security financing

Abstract: We examine the optimal policy response to a transitory demographic shock that affects negatively the financing of retirement pensions. In contrast to existing literature, we endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach identifies optimal strategies of the social security administration to guarantee the financial sustainability of existing retirement pensions in a Pareto improving way. Hence, no cohort will pay the cost of the demographic shock. We find that the optimal strategy is based in 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.

Keywords: Social security; Pensions;

Status: Published in Pension Strategies in Europe and the United States, April 2008, pp. 87-116, MIT Press.

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2007

Number: 2007-041