Paradoxical effects of increasing the normal retirement age: A prospective evaluation

A life-cycle model that incorporates both Disability Insurance (DI) and Old-Age Insurance (OAI) is developed to study Social Security reforms, and is compared to an alternative model without DI. The model with DI predicts that increasing the normal retirement age (NRA) causes a decrease in employment and an increase in DI receipt, and that the decrease of payroll tax revenue and the increase of DI expenses combined offset about 40% of the decrease of OAI expenses. These paradoxical effects of increasing the NRA are absent from the model without DI. I employ both models to search for reforms that will balance the government budget in an economy with an aging population, which has the demographics for the year 2100, and find that the required change in tax and benefit rules differ substantially across the two models.