On Financing Retirement with an Aging Population

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Staff Report 472

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Ellen R. McGrattan - Monetary Advisor
Edward C. Prescott - Senior Monetary Advisor

Revised October 1, 2012

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Abstract
A problem facing the United States is financing retirement consumption as its population ages. Policy analysts increasingly advocate savings-for-retirement systems, but are concerned with insufficient savings opportunities with limited government debt. This concern is unwarranted. First, there is more productive capital than commonly assumed in macroeconomic modeling. Second, if the policy reform subsumes the elimination of capital income taxes, then the value of business equity increases relative to the capital stock. Phasing in a switch from the current U.S. system to a savings-for-retirement system without capital income taxes increases welfare of all current and future cohorts.

RELATED PAPER: Staff Report 473 Technical Appendix: On Financing Retirement with an Aging Population

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