Oliver Pardo

Assistant Professor

Facultad de Ciencias Económicas

Pontificia Universidad Javeriana

Bogotá, Colombia

pardoo@javeriana.edu.co

oliverpardo@gmail.com


This paper shows how taking a job in the informal labor market may help to circumvent the borrowing constraints activated by mandatory retirement savings. Myopic agents may choose to work in the informal sector to avoid the mandatory contributions and increase their present consumption, even if they would be more productive in the formal sector. In this case, decreasing the contribution rate will actually increase their savings and welfare.


Mandatory contributions to retirement saving accounts may tighten existing borrowing constraints, forcing individuals to forgo profitable investment options. This welfare-detrimental effect can be offset if retirement savings are allowed to serve as collateral. Moreover, some credit market imperfections may disappear altogether if this later policy is combined with a pension system with unconditional basic savings.

This paper assesses the macroeconomic and welfare effects of the 2017 U.S. tax reform. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the U.S. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Despite the aggregate net gains for the economy, households at the bottom of the income distribution are going to be worse-off unless the spending cuts necessary to balance the federal budget are targeted at households at the top of the income distribution.