Working Paper: CEPR ID: DP5777
Authors: Vincenzo Galasso
Abstract: Conventional economic wisdom suggests because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals net social security wealth.
Keywords: aging; political equilibria; postponing retirement
JEL Codes: D72; H5; H53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aging populations (J11) | negative income effect (F61) |
| negative income effect (F61) | reduction in net social security wealth (H55) |
| reduction in net social security wealth (H55) | increase in political support for postponing retirement (J26) |
| aging populations (J11) | increase in political support for postponing retirement (J26) |
| increase in dependency ratio (J19) | reduction in profitability of social security systems (H55) |
| reduction in profitability of social security systems (H55) | political push for policy change (D72) |
| increase in median age of voters (J11) | shift in preferences for higher retirement ages (J26) |