The Macroeconomic Consequences of Public Finances : A potential Explanation for the Reduction in Effective Retirement Age

In order to study the macroeconomic effects of public finances, we construct a computable general equilibrium model with overlapping generations, endogenous growth and endogenous retirement age. We calibrate this model on Belgian data. We show that it is able to replicate the observed increase in labor income tax and a substantial part of the drop in the retirement age recorded over the last fifty years. In addition, we find that the sharp increase in government expenditures financed by labor income taxation and the building up of a high level of public debt may have significantly contributed to this evolution. This model further suggests that a policy aimed towards a reduction in the public debt as well as a pension reform implying a lower taxation on old workers would constitute politically feasible alternatives to reduce the negative impact on aging by generating an endogenous increase of the retirement age.