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Demographics and the Political Sustainability of Pay-as-you-go Social Security

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  • Theodore C. Bergstrom
  • John L. Hartman

Abstract

The net present value of costs and benefits from a pay-as-you-go social security system are negative for young people and positive for the elderly. If people all vote their financial self-interest, there will be a pivotal age such that those who are younger favor smaller social security benefits and those who are older will favor larger benefits. For persons of each age and sex, we estimate the expected present value gained or lost from a small permanent increase in the amount of benefits, where the cost of these benefits is divided equally among the population of working age. Assuming that everyone votes his or her long run financial self-interest, and calculating the number of voters in the population of each age and sex, we can determine whether there is majority support for an increase or a decrease in social security benefits. We use statistics on the age distribution and mortality rates for the United States to explore the sensitivity of political support for social security to alternative assumptions about the discount rate, excess burden in taxation, voter participation rates, and birth, death, and migration rates. We find that a once-and-for-all decrease in benefits would be defeated by a majority of selfish voters under a wide range of parameters. We also study the predicted majority outcomes of votes on changing the retirement age.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1378.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1378

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  1. Razin, Assaf & Sadka, Efraim & Swagel, Phill, 2001. "The Aging Population and the Size of the Welfare State," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2930, C.E.P.R. Discussion Papers.
  2. Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2000. "The Political Economy of Social Security," CESifo Working Paper Series 259, CESifo Group Munich.
  3. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 13(3), pages 373-88, September.
  4. Sinn, Hans-Werner & Uebelmesser, Silke, 2003. "Pensions and the path to gerontocracy in Germany," European Journal of Political Economy, Elsevier, Elsevier, vol. 19(1), pages 153-158, March.
  5. 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.
  6. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(1), pages 135-160, February.
  7. Bohn, Henning, 1999. "Will social security and Medicare remain viable as the U.S. population is aging?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 50(1), pages 1-53, June.
  8. Assaf Razin & Efraim Sadka, 2003. "Privatizing Social Security Under Balanced-Budget Constraints: A Political-Economy Approach," CESifo Working Paper Series 1039, CESifo Group Munich.
  9. Uebelmesser Silke, 2004. "Political Feasibility of Pension Reforms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 4(1), pages 1-24, September.
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Cited by:
  1. d'Andria, Diego, 2008. "The Debate on the Sustainability of Social Spending," MPRA Paper 11745, University Library of Munich, Germany.
  2. Edith Sand & Assaf Razin, 2007. "The Role of Immigration in Sustaining the Social Security System: A Political Economy Approach," CESifo Working Paper Series 1979, CESifo Group Munich.

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