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Lessons for an ageing society: the political sustainability of social security systems

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  • Vincenzo Galasso
  • Paola Profeta

Abstract

"What is the future of social security systems in OECD countries? We suggest that the answer belongs to the realm of politics, and evaluate how political constraints and ageing shape the social security system. The increasing ratio of retirees to workers lowers the rate of returns of unfunded pay-as-you-go social security, and induces citizens to prefer smaller such systems and a larger role for private savings. An ageing electorate, however, increases the relevance of pension spending on the agenda of office-seeking policy-makers and tends to increase the size of unfunded pension systems. Calibrating the strength of these effects for France, Germany, Italy, Spain, the UK and the US, we find that the latter political aspect always outweighs the former. The relative size of the effects depends on country-specific characteristics and modelling details: when labour market distortions are accounted for the political effect still dominates but becomes less sizeable; the different redistributive character of pension systems and the strength of family ties also play a role in determining politico-economic outcomes. A higher effective retirement age always decreases the size of the system chosen by the voters, often increases its generosity, and may be the only viable solution to pension system problems in the face of population ageing." Copyright � CEPR, CES, MSH, 2004..

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 19 (2004)
Issue (Month): 38 (04)
Pages: 63-115

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Handle: RePEc:bla:ecpoli:v:19:y:2004:i:38:p:63-115

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References

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  1. CREMER, Helmuth & PESTIEAU, Pierre, . "Reforming our pension system: is it a demographic, financial or political problem?," CORE Discussion Papers RP -1468, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Marcello D’Amato & Vincenzo Galasso, 2002. "Assessing the Political Sustainability of Parametric Social Security Reforms: the Case of Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(2), pages 171-213, December.
  3. J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "The Macroeconomic of Early Retirement," Working Papers 194, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Becker, Sascha O. & Bentolila, Samuel & Fernandes, Ana & Ichino, Andrea, 2004. "Job Insecurity and Children’s Emancipation," IZA Discussion Papers 1046, Institute for the Study of Labor (IZA).
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  6. Marco Manacorda & Enrico Moretti, 2002. "Intergenerational Transfers and Household Structure. Why Do Most Italian Youths Live With Their Parents?," CEP Discussion Papers dp0536, Centre for Economic Performance, LSE.
  7. CASAMATTA, Georges & CREMER, Helmuth & PESTIEAU, Pierre, . "Political sustainability and the design of social insurance," CORE Discussion Papers RP -1449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, retirement, and social security," Economics Working Papers 383, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Vincenzo Galasso, 1999. "The US Social Security System: What Does Political Sustainability Imply?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 698-730, July.
  10. Peter Diamond, 2000. "Social Security Reform," 'Angelo Costa' Lectures Serie, SIPI Spa, issue Lect. I.
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  12. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
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  14. Tito Boeri & Axel Boersch-Supan & Guido Tabellini, 2002. "Pension Reforms and the Opinions of European Citizens," American Economic Review, American Economic Association, vol. 92(2), pages 396-401, May.
  15. Galasso, Vincenzo, 2000. "The US Social Security: A Financial Appraisal For The Median Voter," CEPR Discussion Papers 2456, C.E.P.R. Discussion Papers.
  16. Costa, Dora L., 1998. "The Evolution of Retirement," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226116082.
  17. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
  18. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
  19. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  20. Thomas Cooley & Jorge Soares, 1999. "Privatizing Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 731-755, July.
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