Aggegate and redistributive consequences of the social security reform in Brazil

We quantitatively evaluate the extent to which ageing population and social security legislation can explain the high interest rate in Brazil. To guide our assessment, we consider an overlapping generation economy with heterogeneous agents and incomplete markets. The model is calibrated to the Brazilian economy in 2014, our benchmark year, and is able to match very closely the income inequality and the distribution of retirement replacement rates. We examine the effects of imposing a minimum retirement age of 65 and reduce the average retirement replacement rate from 0.82 to 0.40, which is the value observed in the US. We find that, even though the model predicts a large increase in capital and output, 14.5% and 12% respectively, the fall in the long run interest rate is very small, nearly 7%. When we take into account the demographic transition, social security reform has a much larger effect on capital and output, 46.1% and 30.2% respectively, and the interest rate falls nearly 33%. These results suggest that the interaction between these factors is key to understand the effect of social social security on the long run interest rate. We evaluate the implications over the transition to the new steady steady associated with the social security reform. We find that high income agents burden much of the transition costs associated with the reform.