Abstract

A problem facing the United States and many other countries is how to finance retirement consumption as the number of workers per retiree falls. The problem with a savings for retirement systems is that there is a shortage of good savings opportunities given the nature of most current tax systems and government’s limited ability to honor the debt it issues. The speaker and his research group find that eliminating capital income taxes will greatly increase savings opportunities and make a savings for retirement system feasible with only modest amount of government debt. The switch from a system close to the current US retirement system, which relies heavily on taxing workers’ incomes and making lump-sum transfers to retirees, to one without capital income taxes will increase the welfare of all birth-year cohorts alive today and particularly the welfare of the yet unborn cohorts. The equilibrium paths for the current and alternative policies are computed. The alternative policy entails transfers to current retirees and older workers during the transition to balanced growth. Without these transfers the alternative retirement financing system would not be Pareto superior.

About the Speaker

Edward Prescott is a senior monetary adviser at the Federal Reserve Bank of Minneapolis and the W. P. Carey Chair of Economics at Arizona State University. He was awarded the 2004 Nobel Prize in economic sciences for his contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles. In 2003, he received the Erwin Plein Nemmers Prize in economics. He is a Fellow of the American Academy of Arts and Sciences and the Econometric Society. Prof Prescott has held teaching positions at the University of Minnesota, the University of Chicago, Carnegie-Mellon University, and the University of Pennsylvania. He has authored more than 100 articles and is noted for his contributions to the theory of economic development and growth, banking, and financial markets, as well as business cycles and tax policy. He also developed a methodology for determining whether the stock market is over- or undervalued. Prof Prescott earned his bachelor’s degree in mathematics at Swarthmore College, his master of science in operations research at Case-Western Reserve University and his PhD in economics from Carnegie-Mellon University.

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