SOCIAL SECURITY REFORM THROUGH INCREASES IN THE STATUTORY ENTITLEMENT AGES FOR OLD AGE INSURANCE: OPTIMAL MAGNITUDE AND TIMING

Publicly managed social security agencies providing old-age insurance through intergenerational transfers face ever growing losses in many countries as the natural aging of population over time increases old-age dependency ratios. In addition to raises in old-age insurance premiums and/or reductions in old-age benefits, controlling these losses often requires increases in statutory entitlement ages. As the rate of population aging is a complex demographic phenomenon, the timing and the magnitude of an increase in entitlement age must carefully be decided, by also considering the size of imbalances between premium revenues and expenditures on old-age benefits, as well as the political feasibility of enacting a higher entitlement age. The purpose of this paper is to develop an overlapping-generations model to find the optimal timing of an increase in the statutory entitlement age to be introduced in a country where the authorities want to curb the growth in (or eliminate the) losses generated by the old-age insurance system. Given the complexity of expressions capturing the intertemporal revenue-expenditure balances of a public agency providing old-age insurance and uncertainty about the functional form driving the change in age composition during demographic transition, the problem does not easily lend itself to an analytical solution. By combining numerical techniques with an analytical derivation technique due to Leibniz in a creative way, the paper manages to develop a model which is relatively easy to solve for the optimal timing of increases in the statutory entitlement for old-age insurance, and illustrates its implementation using demographic projection data for Turkey.