Dissertation

Table 2.5: The impact of population aging on the projected retirement benefits under different values of capital’s share in total income.

α = 0.3 α = 0.4 Case 1 32.51% 32.51% Case 2 22.23% 22.19% Case 3 23.79% 25.09% Case 4 19.61% 19.91%

under Case 4 also appears fairly robust: the model predicts declines of roughly 20% from

the respective baselines, compared to the commonly reported estimate of 33%. The relative

importance of the household retirement and the aggregate factor price adjustment mecha-

nisms also appears to be fairly robust with respect to the value of capital’s share in total

income used in the simulations: ignoring either of the two mechanisms leads to a roughly

comparable decline in the projected retirement benefits under both α = 0.3 and 0.4.

Since the model’s predictions about the declines in the projected retirement benefits

under different values of capital’s share in total income are fairly similar, it is natural to

expect that the underlying household-level and macroeconomic adjustments to population

aging are also similar. To verify this, I report in Table 2.6 the effect of the demographic

change on household behavior and factor prices under both α = 0.3 and 0.4. It is clear from

the table that both the household-level responses and the aggregate factor price adjustments

to population aging are fairly robust to the underlying value of capital’s share in total

income. Under both α = 0.3 and 0.4, households respond to a higher life expectancy by

increasing their private saving (and therefore aggregate capital and the wage rate) and also

by delaying retirement, which leads to an increase in the tax base of the social security

program.

It is also useful to note that accounting for both the household-level and macroeconomic

adjustments to population aging, the tax increases required to restore projected retirement

benefits to their respective baseline levels are also very similar for different α-values. For

α = 0.3, increasing the tax rate to 13.7% restores projected benefits to their baseline level

under Case 4, and for α = 0.4 a tax rate of 13.8% achieves this.

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