Current Institutional Affiliation
Associate Professor, Economics, City University of New York (CUNY) / Hunter College

Award Information

Abe Fellowship 2011
Institutional Affiliation (at time of award):
Associate Professor, Economics, City University of New York (CUNY) / Hunter College
Demographic transition and sustainable social security in the United States and Japan

Are the social security systems in developed economies sustainable given the ongoing shift in demographics? The answer is most likely no, in many countries, unless some kind of reform is undertaken. Improvement in the medical technology and access to better nutrition and health services have contributed to the rise in life-expectancy, while fertility rates have declined considerably. The demographic change poses a significant fiscal challenge to the public pension program since fewer workers contribute to the system through taxation while more retirees begin to collect pension benefits. What are the policy options to restore the budget balance and make the social security sustainable in the long-run? How do economic costs differ across alternative reforms? The project uses a dynamic economic model to respond to the questions, presents a menu of policy options, and quantifies the magnitude of required fiscal adjustments and economic impact under each option. The first part of the project will focus on the U.S. economy. I build and simulate a dynamic economic model of households, who make economic decisions along the life-cycle and optimally choose saving, consumption and labor supply at each age. Using such a behavioral model allows me to analyze the responses of individuals to the demographics change and alternative policies to deal with the fiscal challenge. The policy debate is often unstructured and focused on simple accounting exercises, but it is critical to assess the economic impact of a policy and changes in household behaviors, such as disincentives on work effort or investment due to higher taxes, etc. I will evaluate various policies that are being debated by policy makers and the public such as extending the retirement age, raising the payroll taxes and reducing income replacement rates of pensions and quantify the effects of policies on household decisions and aggregate economy. In the second part of the project, I will shift attentions to the Japanese economy, which is likely to face an even more severe and pressing fiscal challenge than the U.S. due to more rapid demographic aging. The dependency ratio (ratio of population aged 65 and above to that of 15-64) has grown from 8% in 1950 to 35% in 2010, projected to reach 70% by 2050. (The numbers in the U.S. are 13%, 20% and 35%, respectively.) Without a sharp reduction in pension benefits or a steep rise in payroll taxes, the system will soon become unsustainable. The economy is also different from the U.S. in that female labor force participation is much lower, especially at child-bearing ages, and the wage of working females tends to be much lower than males. In addition to the policies simulated in the U.S. economy, I will consider ways to improve the social security budget through an increase in the female labor force participation and their earnings. I will also study the impact of selective immigration policies on the social security budget and assess the extent to which a policy would raise the economy's labor inputs and expand the income base for social security taxes.