Currently the Social Security program runs a surplus and revenues from payroll
taxes exceed the bene¯ts paid to retirees. The surplus is expected to decline over the
next decade and eventually turn to a de¯cit. Our model predicts an annual budget
de¯cit of 3.5% of GDP under the 2080 demographics unless a reform is undertaken.
A 50% reduction in the size of the current unfunded system will reduce the de¯cit to
1.6% of GDP. Increasing the normal retirement age from 66 to 68 will also help reduce
the budget de¯cit since more individuals will postpone the retirement and the bene¯t
spending will fall, while labor participation among the old-age individuals rises and the
payroll tax revenues increase. An increase in the early retirement age will not have any
signi¯cant e®ect on the budget of the Social Security system, since the bene¯ts will be
permanently raised by forcing individuals to postpone retirement. Our study suggests
that a combination of policies that encourage the participation and work e®ort of the
elderly are needed for the sustainability of the system.