Effects of Unfunded Pension Reform on Economic Growth Under Endogenous Retirement

This study characterizes an unfunded pension system financed by labor income and capital income taxes in an overlapping generations (OLG) economy with endogenous growth. We examine and compare the effects of labor income and capital income taxes on endogenous retirement, economic growth, and social welfare by employing a two-period OLG model. We find that increasing labor income and capital income taxes leads to a decrease in elderly labor supply. Based on this finding, an inverted U-shaped relationship exists between a capital income tax and growth under certain conditions. Although conventional wisdom is that capital should not be taxed in the long run, this study observes that social welfare may reach a higher level under a pension system funded by capital income tax rather than that funded by labor income tax