Lower optimal pension payments in aging societies

What is it about?

Modern public pay-as-you-go pensions are rather generous in almost all industrialized countries. We argue that public pensions should be drastically reduced along with the contributions to the social security. In fact, pensions should be approximately cut by half in the US economy. During the transition to the new long-run equilibrium, the present young generations need to be compensated. Welfare gains are considerable and amount to several percentage points of GDP.

Featured Image

Why is it important?

The demographic transition puts huge pressure on government finances. Higher public pensions and health expenditures might even endanger fiscal sustainability meaning that the government cannot finance its expenditures by means of tax revenue and needs to rely upon increasing and eventually exploding debt. We show that in case of a greyer population, public pensions should even be smaller.