Global demographic trends and social security reform

Orazio Attanasio, Sagiri Kitao, Giovanni L. Violante

Research output: Contribution to journalArticle

52 Scopus citations

Abstract

How sustainable are the current social security systems in the developed economies, given the projected demographic trends? The most recent literature has answered this question through dynamic general-equilibrium models in a closed-economy framework. This paper provides a new quantitative benchmark of analysis for this question represented by a two-region model (South and North) of the world economy where capital flows across regions. The timing and the extent of the demographic transition-and the associated economic forces shaping capital accumulation and equilibrium factor prices-are very different in the two regions. Thus, the projected paths of interest rate and wage rate in the North diverge substantially between closed and open economy. We perform a wide range of policy experiments under both scenarios. Our main conclusion is that if one is interested in quantifying the path of the fiscal variables (e.g., the value of the payroll tax) needed to keep the social security system viable or to finance a transition towards a fully funded system, then these two benchmarks yield similar results. However, if the focus is on quantifying the path of factor prices, aggregate variables and, ultimately, welfare, then the two approaches can diverge significantly.

Original languageEnglish (US)
Pages (from-to)144-198
Number of pages55
JournalJournal of Monetary Economics
Volume54
Issue number1
DOIs
StatePublished - Jan 1 2007
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Capital flows
  • Demographic trends
  • Social security
  • Two-region model

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