How did the US government preferences over income redistribution across generations and within generations change during 1980–2010? I construct a state-of-the-art quantitative overlapping generations model, introducing endogenous human capital accumulation decision, early retirement decision, education-specific mortality, and the Medicare program. The Ramsey planner jointly sets the replacement rate level in the public pension system and the progressivity of the income tax-and-transfer program. The novelty of my approach is to specify the education- and age-specific Pareto weights in the social welfare function using a flexible class with two parameters, identify these parameters inside the model, and assess their change over the last four decades. The Pareto weight distribution has shifted toward more educated and more elderly agents. Relative change in voter turnout rates in the data corroborates this finding.
The 2003 Job Growth Tax Relief Reconciliation Act (JGTRRA) reduced dividend and capital gains tax rates in the U.S. Contrary to the public expectations and predictions of existing economic models, the JGTRRA reform had no statistically significant effect on firm investment. The paper provides a novel mechanism to resolve the puzzle. We use a standard heterogeneous firm model. To resolve the puzzle, we propose a mechanism with policy uncertainty, where a government can repeal a shareholder tax cut in the future with a constant and known probability, resetting policy variables to their pre-reform levels. Even moderate uncertainty levels (the probability of policy withdrawal each period is only 3.3%) mute entirely the aggregate investment response to a shareholder tax cut.
Despite increasing earnings inequality and population aging, there has been no major reform of Social Security since 1977. Why? I build upon a standard overlapping generations model in the style of Huggett (1996), introducing a Ramsey planner who chooses optimally the replacement rate level. The novelty of my approach is to augment the social welfare function by age-dependent Pareto weights using a flexible functional form with an unknown parameter and identify it inside the model calibrated to the 1980s and 2010s. The age distribution of Pareto weights has shifted toward elderly agents. This finding is obtained after accounting for population aging. In other words, the elderly now hold more influence in policymaking not solely due to their increasing numbers but also because their relative Pareto weight has grown.
Differences in household savings behavior across income levels are key for understanding wealth inequality. We propose asset market access as a novel explanation for these differences. We document three new facts about the joint distribution of income and wealth in the United States: (i) wealth gaps by income are primarily driven by differences in asset market participation rather than invested amounts; (ii) participation heterogeneity mirrors differences in observed market access; and (iii) most wealth is accumulated through financial products with contractual savings flows, such as mortgage payments and retirement contributions. We then develop a life-cycle model of financial lifetime decisions: buying a home, starting a retirement plan, and becoming an entrepreneur. In the model, income-dependent access to mortgages and retirement plans endogenously determines household participation decisions, while financial contracts and capital gains govern wealth accumulation among the market participants. Equalizing initially heterogeneous access increases wealth for the bottom half of the income distribution by 32%. We evaluate a currently proposed policy to expand access to retirement plans through a government-sponsored option and find it effective in fostering broad-based wealth accumulation. Thus, we conclude that today's asset markets in the United States do not offer a level playing field for wealth building.
We study whether redesigning the social security and income tax-transfer systems can deliver significant welfare gains. Our rich quantitative model features both realistic inequality over the lifecycle and the key channels through which redistributive policies can distort aggregate allocations. We find that there are two distinct ways to achieve significant welfare gains. The first prioritizes reducing distortions through a regressive pension system, resulting in higher inequality. The second reduces inequality through progressive pensions, complemented with a less progressive tax system to mitigate the rise in distortions. In both reform types, pension progressivity emerges as a powerful instrument to either manage distortions or redistribute income within generations. Since redistributive instruments turn out to be highly distortionary in our benchmark economy, the policy reducing distortions turns out to be optimal under utilitarian social welfare.
Private retirement plans have become an increasingly important component of household wealth in the United States, with nearly two-thirds of Americans having access to employer-sponsored defined contribution plans. These plans have significant tax advantages, as both employee and employer contributions are tax-exempt, while the returns remain untaxed until their withdrawal during retirement. We develop a quantitative lifecycle model that incorporates both private and public pension systems, as well as a detailed tax-and-transfer system. Preliminary results show that our model is able to replicate key empirical regularities, such as the observed distribution of private retirement wealth by age and income, particularly for high-income earners. We plan to evaluate policy reforms that consider alternative tax treatments for private pensions and their interaction with the income tax and public pension systems, contributing to the debate on the optimal design of retirement savings incentives. These exercises will enhance our understanding of how different interconnected parts of the tax and pension systems shape the level of inequality and aggregate distortions in the U.S. economy, allowing us to design more efficient and equitable systems of redistribution and social insurance.
Population aging imposes a challenge for the public pension systems in many developed countries. The solvency of the pension system requires a broad set of policy measures. The paper addresses the following question: What are the macroeconomic consequences of increasing the social security contribution rate in Germany? The question is answered theoretically by setting up a two-period partial equilibrium overlapping generations (OLG) model and analyzing the impact of a marginal increase in the contribution rate on the worker’s optimal labor supply. The key finding is that the labor supply response crucially depends on the model assumptions regarding: 1) the relative magnitudes of the population growth rate and the real rate of return on private saving, 2) the individual’s utility function; and 3) the labor income tax and the pension benefit function. In case of a linear labor income tax and earnings-dependent pensions, which approximate the current German pension system, the theory predicts a rise in employment in response to a payroll tax increase for a conventional specification of the utility function and a plausible parameterization of the model parameters.