The net effect of labor supply in the model used in this section is simple the represented by the fall in the size of the labor force; since labor supply is not an endogenous variable in this model, and since the retirement age has not been experimented with. For both the former and latter arguments, there is referred to Jorgensen and Jensen (2010), but these issues, in the context of Brazil, are left for future research.

An additional implication of the increase in the retirement age is that lifetime leisure will fall, and this further increases the demand for leisure during the working period. These mechanisms will counteract the increase in effective labor supply from the increase in the statutory retirement age — which is an important endogeneity issue that policy makers should be aware of. Consequently, if policy makers want to achieve a certain increase in effective labor supply from increasing the statutory retirement age, this increase will have to be even higher than initially presumed, since one must account for the endogenous reduction in the intensity of labor supply (Jorgensen and Jensen, 2010). This could also be interpreted as an endogenous drop in the voluntary early retirement age, financed by workers’ own savings. This is exactly the opposite of what is intended by a policy rule of increasing the statutory retirement age in line with life expectancy.

# **_Robustness and Sensitivity_**

When comparing the three alternative financing scenarios considered in this section, it is important to note two issues. First, the model used is not meant to replicate the Brazilian economy perfectly; the model has several shortcomings but is, on the other hand, structured to account for the main channels through which the effects of population aging will be transmitted. It is important to use judgment relative to the models strengths and weaknesses, as discussed below. Second, in addition to the Tax, Benefit and Debt-Financing alternatives, the Brazilian government also has the option of adjusting other taxes or benefits than those considered here.

Behind the general equilibrium result results presented above lies the specific model assumption of a closed economy, where factor payments are endogenous and fully respond to changes in the capital per worker ratio. In reality, Brazil is not a closed economy and the response of factory payments should be adjusted downward to some extent when considering the long term implications of aging. Increased immigration and labor force participation, as well as an increasingly open capital account, would lead to such reductions in magnitudes.

The openness of the capital account, and whether domestic saving turn into domestic investments, are crucial questions. Rodrik (1999) argues that, as a matter of accounting necessity, investment has to be financed by saving, from either domestic or foreign sources: “in an economy investing, for example, 30 percent of its GDP, relying on foreign saving beyond this limit, would imply running a persistent current account deficit in excess of 6 percent of GDP, which would be courting with disaster” (Rodrik, 1999:2). In future research there should be thrown some sand in the wheels of a standardized closed economy model to account for such dynamics in Brazil.

The results remain broadly the same analyzing an open-economy version of the model — depending on whether factor prices are assumed to endogenously change to a full extent (closed economy) or whether they remain completely constant (open economy). Table 4 testifies to the robustness of these results. The main difference in the simulations is the smaller reaction of the debt/GDP ratio in an open economy setting, which is due to real interest rate which will not explode in size when capital 26