To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2006.12.010 Byline: Orazio Attanasio (a), Sagiri Kitao (b), Giovanni L. Violante (c) Abstract: How sustainable are the current social security systems in the developed economies, given the projected demographic trends? The most recent literature has answered this question through dynamic general-equilibrium models in a closed-economy framework. This paper provides a new quantitative benchmark of analysis for this question represented by a two-region model (South and North) of the world economy where capital flows across regions. The timing and the extent of the demographic transition -- and the associated economic forces shaping capital accumulation and equilibrium factor prices -- are very different in the two regions. Thus, the projected paths of interest rate and wage rate in the North diverge substantially between closed and open economy. We perform a wide range of policy experiments under both scenarios. Our main conclusion is that if one is interested in quantifying the path of the fiscal variables (e.g., the value of the payroll tax) needed to keep the social security system viable or to finance a transition towards a fully funded system, then these two benchmarks yield similar results. However, if the focus is on quantifying the path of factor prices, aggregate variables and, ultimately, welfare, then the two approaches can diverge significantly. Author Affiliation: (a) University College London, CEPR, IFS, and NBER, UK (b) New York University, USA (c) New York University, and CEPR, USA Article History: Received 22 September 2006; Revised 5 December 2006; Accepted 6 December 2006 Article Note: (footnote) [star] We are grateful to Mark Gertler, Martin Schneider, Kjetil Storesletten and various seminar participants for comments. We are particularly indebted to Debbie Lucas for her insightful discussion of an earlier version of the paper. We also thank Annamaria Lusardi, Jonathan Skinner, and Steve Venti for allowing us to use their data.