Sustainable Social Security: Four Options
This paper presents four policy options to make Social Security sustainable under the coming demographic shift: 1) increase payroll taxes by 6 percentage points, 2) reduce the replacement rates of the benefit formula by one third, 3) raise the normal retirement age from sixty six to seventy three, or 4) means test the benefits and reduce them one to one with income. While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.