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Retirement Financing: An Optimal Reform Approach
Author(s) -
Hosseini Roozbeh,
Shourideh Ali
Publication year - 2019
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta15088
Subject(s) - economics , inefficiency , subsidy , pareto principle , pareto optimal , overlapping generations model , earnings , yield (engineering) , microeconomics , finance , multi objective optimization , operations management , materials science , machine learning , computer science , market economy , metallurgy
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.