Implications of Increasing College Attainment for Aging in General Equilibrium

Juan Carlos Conesa

Timothy J. Kehoe

Vegard M. Nygaard

Gajendran Raveendranathan

May 2019 | Federal Reserve Bank of Minneapolis Staff Report 583

We develop and calibrate an overlapping generations general equilibrium model with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of exogenous trends of increasing college attainment, decreasing fertility, and increasing longevity. Keeping the major U.S. social insurance programs in place, we perform comparative statics with balanced growth paths. While all three exogenous trends contribute to a higher old age dependency ratio, increasing college attainment has different macroeconomic implications because it also leads to more productive workers. Increasing college attainment lowers the required increase in the labor tax rate due to decreasing fertility and increasing longevity by 8.3 percentage points. The required increase in the labor tax rate is 2.9 percentage points higher under general equilibrium than in a small open economy with constant prices because lower interest rates reduce capital income tax revenues.