O PTIMAL R ESPONSE TO A D EMOGRAPHIC S HOCK

We examine the optimal policy response to an exogenously given demographic shock. Such a shock affects negatively the financing of retirement pensions, and we use optimal fiscal policy in order to determine the optimal strategy of the social security administration. Our approach provides specific policy responses in an environment that guarantees the financial sustainability of existing retirement pensions. At the same time, pensions will be financed in a way that by construction generates no welfare losses for any of the cohorts in our economy. In contrast to existing literature we endogenously determine optimal policies rather than exploring implications of exogenously given policies. Our results show 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.

[1]  Panu Poutvaara,et al.  Public Education in an Integrated Europe: Studying to Migrate and Teaching to Stay? , 2006, SSRN Electronic Journal.

[2]  Erkki Koskela,et al.  Optimal Harvesting Under Resource Stock and Price Uncertainty , 2005, SSRN Electronic Journal.

[3]  J. Jimeno,et al.  The Private and Fiscal Returns to Schooling and the Effect of Public Policies on Private Incentives to Invest in Education: A General Framework and Some Results for the EU , 2005, SSRN Electronic Journal.

[4]  T. Bergstrom,et al.  Demographics and the Political Sustainability of Pay-as-You-Go Social Security , 2005 .

[5]  Sascha O. Becker,et al.  Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals , 2005, SSRN Electronic Journal.

[6]  E. Galli,et al.  Sustainability and Determinants of Italian Public Deficits Before and after Maastricht , 2005, SSRN Electronic Journal.

[7]  L. Alvarez,et al.  Progressive Taxation and Irreversible Investment Under Uncertainty , 2005, SSRN Electronic Journal.

[8]  Christian Gollier,et al.  The consumption-based determinants of the term structure of discount rates , 2005, SSRN Electronic Journal.

[9]  Marc St-Pierre,et al.  Unequal Opportunities and Human Capital Formation , 2005, SSRN Electronic Journal.

[10]  Oliver Hülsewig,et al.  Bank Loan Supply and Monetary Policy Transmission in Germany: An Assessment Based on Matching Impulse Responses , 2005, SSRN Electronic Journal.

[11]  J. Conesa,et al.  Optimal Response to a Demographic Shock , 2005, SSRN Electronic Journal.

[12]  Christa Hainz.  Quality of Institutions, Credit Markets and Bankruptcy , 2004, SSRN Electronic Journal.

[13]  A. Hughes.  Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation , 2004 .

[14]  J. Stein.  Optimal Debt and Equilibrium Exchange Rates in a Stochastic Environment: An Overview , 2004, SSRN Electronic Journal.

[15]  M. Pesaran,et al.  Model Averaging and Value-at-Risk Based Evaluation of Large Multi-Asset Volatility Models for Risk Management , 2004, SSRN Electronic Journal.

[16]  Elise S. Brezis,et al.  The Role of Higher Education Institutions: Recruitment of Elites and Economic Growth , 2004, SSRN Electronic Journal.

[17]  J. Strand,et al.  A Risk Allocation Approach to Optimal Exchange Rate Policy , 2004, SSRN Electronic Journal.

[18]  Peter Ockenfels,et al.  Measuring Strategic Uncertainty in Coordination Games , 2004, SSRN Electronic Journal.

[19]  Antonis Adam.  Macroeconomic Effects of Social Security Privatization in a Small Unionized Economy , 2004, SSRN Electronic Journal.

[20]  P. Egger,et al.  Outsourcing and Trade in a Spatial World , 2004 .

[21]  P. Friedrich,et al.  Significance and Determination of Fees for Municipal Finance , 2004, SSRN Electronic Journal.

[22]  A. Simonovits.  Designing Benefit Rules for Flexible Retirement with or Without Redistribution , 2004, Social Science Research Network.

[23]  Jay Pil Choi,et al.  Antitrust Analysis of Tying Arrangements , 2004, SSRN Electronic Journal.

[24]  Robert Woods,et al.  Fiscal Stabilisation and Emu , 2004, SSRN Electronic Journal.

[25]  Jan C. van Ours,et al.  How Changes in Financial Incentives Affect the Duration of Unemployment , 2004, SSRN Electronic Journal.

[26]  Bruno Jullien,et al.  Two-Sided Markets and Electronic Intermediaries , 2004, SSRN Electronic Journal.

[27]  Helge Berger,et al.  How should large and small countries be represented in a currency union? , 2004, SSRN Electronic Journal.

[28]  M. Pesaran.  Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure , 2004, SSRN Electronic Journal.

[29]  Ludger Woessmann,et al.  The Effect Heterogeneity of Central Exams: Evidence from Timss, Timss-Repeat and PISA , 2004, SSRN Electronic Journal.

[30]  J. Conesa,et al.  Optimal Design of Social Security Reforms , 2004 .

[31]  D. Gollin.  Getting Income Shares Right , 2002, Journal of Political Economy.

[32]  M. Boldrin,et al.  The Intergenerational State: Education and Pensions , 2002 .

[33]  Martin Gervais,et al.  Optimal Taxation in Life-Cycle Economies , 2000, J. Econ. Theory.

[34]  Thomas J. Sargent,et al.  Projected U.S. Demographics and Social Security , 1999 .

[35]  Thomas F. Cooley,et al.  A Positive Theory of Social Security Based on Reputation , 1999, Journal of Political Economy.

[36]  P. Kehoe,et al.  Optimal Fiscal and Monetary Policy , 1999 .

[37]  Gene M. Grossman,et al.  Intergenerational Redistribution with Short-Lived Governments , 1996 .

[38]  L. Tesar,et al.  Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption , 1994 .

[39]  D. Gale.  Pure Exchange Equilibrium of Dynamic Economic Models. , 1973 .

[40]  C. Gollier.  Optimal Illusions and Decisions Under Risk , 2005, SSRN Electronic Journal.

[41]  Marcel Gérard,et al.  Combining Dutch Presumptive Capital Income Tax and US Qualified Intermediaries to Set Forth a New System of International Savings Taxation , 2004 .

[42]  Karsten Jeske,et al.  Pension Systems and Aggregate Shocks , 2003 .

[43]  Michele Boldrin,et al.  Political Equilibria with Social Security , 2000 .

[44]  Carlos Garriga-Calvet.  Optimal Fiscal Policy in Overlapping Generations Models , 2000 .

[45]  G. Hansen,et al.  The Cyclical and Secular Behavior of the Labor Input: Comparing Eciency Units and Hours Worked , 1993 .

[46]  • from the CESifo website: www.CESifo.deCESifo Working Paper No. 1387 EXPECTED CLOSENESS OR MOBILISATION: WHY DO VOTERS GO TO THE POLLS? , 1981 .

[47]  G. Reed.  Social security. , 1959, Hospital progress.