Declining r∗ in the US: The role of Social Security

Abstract

We develop a quantitative life-cycle model to study the impact of Social Security on the US natural interest rate, $r^{\ast }$. Past reforms mitigated the $r^{\ast }$ decline, raising the natural rate by approximately 1 percentage point between 1970 and 2015 through higher replacement rate and retirement age. In the future, increasing the retirement age would counteract the downward pressure on $r^{\ast }$ due to demographics more than reforms entailing higher contribution or lower replacement rates, with the latter reform delivering the lowest $r^{\ast }$ value across different future productivity scenarios for the US economy.