Econometrica: Jul 2019, Volume 87, Issue 4

Retirement Financing: An Optimal Reform Approach

https://doi.org/10.3982/ECTA15088
p. 1205-1265

Roozbeh Hosseini, Ali Shourideh

We study Pareto optimal policy reforms aimed at overhauling retirement financing as an integral part of the tax and transfer system. Our framework for policy analysis is a heterogeneous‐agent overlapping‐generations model that performs well in matching the aggregate and distributional features of the U.S. economy. We present a test of Pareto optimality that identifies the main source of inefficiency in the status quo policies. Our test suggests that lack of asset subsidies late in life is the main source of inefficiency when annuity markets are incomplete. We solve for Pareto optimal policy reforms and show that progressive asset subsidies provide a powerful tool for Pareto optimal reforms. On the other hand, earnings tax reforms do not always yield efficiency gains. We implement our Pareto optimal policy reform in an economy that features demographic change. The reform reduces the present discounted value of net resources consumed by each generation by about 7 to 11 percent in the steady state. These gains amount to a one‐time lump‐sum transfer to the initial generation equal to 10.5 percent of GDP.



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Supplement to "Retirement Financing: An Optimal Reform Approach"

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Supplement to "Retirement Financing: An Optimal Reform Approach"

This zip file contains the replication files for the manuscript and notes describing how we solved the cost minimization planning problem in “Retirement Financing: An Optimal Reform Approach”.

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