Date of Award:

5-2011

Document Type:

Dissertation

Degree Name:

Doctor of Philosophy (PhD)

Department:

Applied Economics

Advisor/Chair:

Frank N. Caliendo

Abstract

Over the past few decades, falling birth rates and increasing life expectancies have threatened the viability of social security programs all across the Organization for Economic Co-operation and Development (OECD). In this dissertation, I attempt to shed some light on the extent of the crisis that the social security program in the United States (U.S.) currently faces, and I also recommend one possible reform policy. In the first essay, I provide an alternative estimate of the impact of population aging on the future social security benefits in the U.S., while accounting for the household-level and macroeconomic adjustments to population aging. Using a general equilibrium life-cycle consumption model with endogenous retirement and incomplete private annuity markets, I find that once these adjustments are accounted for, population aging in the U.S. is likely to cause a significantly smaller decline in the future benefits as compared to the commonly reported estimates that suggest a 25-33% decline. I also find that ignoring either the household retirement mechanism or the aggregate factor price adjustment mechanism could lead to a roughly comparable overestimation of the decline in the future retirement benefits. In the second essay, I ask what should be the optimal or welfare-maximizing social security (OASI) tax rate in the U.S. under such demographic developments. I examine this question using a heterogeneous-agent general equilibrium model of life-cycle consumption and labor supply, where social security provides partial insurance against unfavorable efficiency realizations that occur before the agents enter the model. I first calibrate the model such that the current OASI tax rate in the U.S. maximizes social welfare under the current demographics, and then I incorporate empirically reasonable population projections into the calibrated model. Finally, I search for the tax rates that are optimal under such projections. I find that the tax rates that maximize welfare under such projections are about 2 to 5 percentage points higher than the current rate. I also find that a large part of the tax burden of population aging is picked up by the households with relatively favorable efficiency realizations. Finally, the model also predicts that population aging and the optimal tax response may imply a decline in the projected retirement benefits, but of a magnitude smaller than when the tax rate is held unchanged at the current level.

Comments

This work made publicly available electronically on May 11, 2011.