Social Security Reform in an Economy with Population Aging

This paper analyzes the macroeconomic and welfare effects of population aging and Social Security reform. First, a stochastic overlapping-generations model with heterogeneous agents is carefully extended to an aging society. The model uses the intermediate population projection of the Trustee Report, and it generates baseline economies as equilibrium transition paths starting year 1961. Under this reasonable aging assumption, per capita labor supply will decrease in the long run, and per capita national wealth will increase compared to the balanced growth path, although the private saving rate will be declining. Then, the paper analyzes three stylized but realistic Social Security reform plans that cut benefits, increase the payroll tax cap, and introduce personal savings accounts with benefit offsets