Retirement Financing: An Optimal Reform Approach

Abstract

We study policy reforms aimed at overhauling retirement financing. We develop a novel approach by considering optimal reforms: policy reforms that minimize the cost for the government while respecting the distribution of welfare in the economy.Our model is an OLG model with life-cycle features and bequest motives where individuals are heterogeneous in their earning ability and mortality. Theoretically, we show that due to the negative correlation between earnings ability and mortality, postretirement distortions to saving decisions are a robust feature of any optimal policy. We, then, use this framework to quantitatively analyze optimal reforms. Our quantitative exercise shows that an optimal reform relative to the status-quo must have three key features: First, post-retirement assets must be subsidized while bequests must be taxed. On average, optimal marginal subsidies on assets for individuals above age 65 is 3.2 percent, while optimal marginal tax on their bequest is 60 percent. Second, pre-retirement transfers must increase while social security benefits must become less generous in the aggregate and more progressive towards low income groups. Finally, earnings tax reform does not contribute to optimal reforms, i.e., optimal marginal taxes on earnings remain very close to the status-quo. The optimal policies reduce the present discounted value of net tax and transfers to each generation by 15 percent. * We would like to thank Berthold Herrendorf valuable comments and discussions.

Is There a Demand for Reverse Mortgages in China? Evidence from Two Online Surveys

“…There is a growing literature that studies the optimal design of a pension system (e.g., Golosov et al (2013), Shourideh and Troshkin (2017), Huggett and Parra (2010) and Hosseini and Shourideh (2019)). In particular, Hosseini and Shourideh (2019) study Pareto optimal policy reforms aimed at overhauling retirement …nancing as part of a comprehensive …scal policy in the US. They consider the Pareto optimal policy reform in which the consumption tax is used to …nance additional …scal costs of population aging.…”

“…They consider the Pareto optimal policy reform in which the consumption tax is used to …nance additional …scal costs of population aging. We use a similar modeling approach to that in Hosseini and Shourideh (2019) including heterogeneity in earning ability and mortality, but focus on a di¤erent question. We do not aim to …nd a …rst best design of the US pension system.…”

Optimal progressivity with age-dependent taxation

“…Finally, one could enrich our model of the life cycle and to address the extent to which age variation in marriage rates and fertility choices calls for age variation in the optimal tax and transfer system. Later in the life-cycle, age variation in taxation can potentially substitute for missing private markets against longevity risk in the spirit of Hosseini and Shourideh (2017).…”

How Should Capital Be Taxed?

“…These difficult questions have attracted some attention in the recent literature. For example, the treatment of pension savings in the tax system when individuals are subjective to self‐control problems or cognitive biases, and the appropriate role of the government to deal with such issues, is analyzed by Moser and Silva (2019) and Hosseini and Shourideh (2019).…”