Abstract
Reform is inevitable in an aging economy with a generous pay-as-you-go social security system. Often, however, the timing and structure of reform are unknown. We explicitly model policy uncertainty in a general equilibrium life-cycle model and let agents update expectations and react as uncertainty is resolved over time. Using the case of Japan, a country facing severe demographic and fiscal challenges, we quantify welfare tradeoff across generations by delaying reform or reducing its scope. Individuals respond to a delay by dis-saving and working less, while facing higher taxes to cover additional expenditures during the transition. Fiscal uncertainty itself has a more significant adverse effect on older individuals, who face greater income risks and a lower return on their retirement savings.
Original language | English |
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Pages (from-to) | 81-100 |
Number of pages | 20 |
Journal | Review of Economic Dynamics |
Volume | 27 |
DOIs | |
Publication status | Published - 2018 Jan 1 |
Keywords
- Aging demographics
- Fiscal sustainability
- Japanese economy
- Pension reform
- Policy uncertainty
ASJC Scopus subject areas
- Economics and Econometrics