Date Added: Dec 2010
Demographic challenges have been threatening the fiscal sustainability of pension systems across most of the developed world. A popular policy response to pension financing difficulties is the encouragement (or enforcement) of later retirement, as well the legislation of higher payroll taxes over time. In this paper the authors analyze how various tax policy experiments, including changes in the Social Security payroll tax, affect people's desire to leave the workforce and the state of the economy. For this purpose they build a general-equilibrium life-cycle model with rational and myopic consumers, facing a mortality risk. Agents leave accidental bequests and are heterogeneous in their age-dependent work productivity. They incorporate productive government expenditures, categorize people into the rich and poor, and endogenize people's retirement decision.