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Implications of Increasing College Attainment for Aging in General Equilibrium

Staff Report 583 | Revised January 14, 2020

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Authors

Juan Carlos Conesa Stony Brook University

Vegard M. Nygaard University of Houston

Gajendran Raveendranathan McMaster University

Implications of Increasing College Attainment for Aging in General Equilibrium

Abstract

We develop an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of increasing college attainment, decreasing fertility, and increasing longevity (2005–2100). While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 33.5 to 47.1 percent. Increasing college attainment lowers the required tax increase by 12.0 percentage points. The labor tax rate required to balance the government budget is higher under general equilibrium than in a small open economy with a constant interest rate, because the reduction in the interest rate lowers capital income tax revenues.


Published in: European Economic Review (Vol. 122, February 2020), https://doi.org/10.1016/j.euroecorev.2019.103363.

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