Dissertation

Table 3.28: The effect of population aging on the calibrated model with the pollution externality.


0.98 0.79 0.8 0.71
Experiment Baseline 1 2 3
Variable
Social security tax rate 0.1051 0.0827 0.099 0.099 Replacement rate for the poorest

households

13.58 13.57 13.83 14.23

Rate of return 0.0293 0.0276 0.0244 0.0201 Wage rate 1.22 1.23 1.25 1.28 Output 41.33 44.55 48.23 53.27 Capital 132.31 144.97 161.63 186.23 Stock of pollutant 1.08 1.11 1.15 1.2 Labor 22.09 23.6 25.15 27.15 Capital-output ratio 3.2 3.25 3.35 3.5 Decline in aggregate utility due to

pollution(%)

with the pollution externality, the optimal response to all the demographic shocks is to

reduce the social security tax rate: under the low-cost projection, the model predicts a

decline of slightly over 2 percentage points from the baseline, and under the intermediate

and the high-cost projections, it predicts a decline of 0.61 percentage points. The effect of

population aging and the optimal tax response on the equilibrium real rate of return, the

wage rate, output, aggregate capital stock, labor supply and the capital-output ratio are

very similar to that observed in the model without the pollution externality. However, the

table also shows that with the increase in capital stock, the equilibrium stock of pollutant

also increases, and the decline in aggregate utility remains roughly unchanged at about

14%.

The factors that drive these changes in the optimal social security tax rate are virtually

unaffected by the introduction of the pollution externality in the model. To see this, consider

Tables 3.29 and 3.30, where I respectively report the households’ IRRs from the social

security program and the optimal (model) retirement ages in the post-population aging

steady states with the social security tax rate held fixed at the baseline level of θ = 0.1051.

Table 3.29 reveals a very similar pattern of the impact of population aging on the IRRs of

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