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The US Social Security: A Financial Appraisal For The Median Voter

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  • Galasso, Vincenzo

Abstract

Why do voters support PAYG social security systems? Browning (1975) suggested that for a majority of voters, who consider past contributions as a sunk cost, unfunded systems may represent a better investment than alternative assets, such as mutual or pension funds. I quantify the relevance of Browning's argument by analysing the performance of the US social security system as an asset. For different specifications of the median voter's household at US Presidential elections from 1964 to 1996, I calculate the return from 'investing' in social security, i.e. the rate of discount that equalizes the expected present value of current and future contributions with the expected present value of pension benefits. For the baseline family, the returns fluctuate between 5.7% in 1984 - with a 43 year old median voter - and 9.8% in 1964 - 46 year old median voter - and is therefore in line with the average US stock market return over the last century: 6.6% for the S&P Composite. In particular, social security outperforms both S&P Composite and Dow Jones Industrial Average in ex-post returns for the median voters at the 1964 and 1968 elections, this difference vanishes in the 1972 election, and it is reversed in the 1976 election.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2456.

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Date of creation: May 2000
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Handle: RePEc:cpr:ceprdp:2456

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Keywords: Median Voter; Returns On Public Pensions;

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Cited by:
  1. J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Early Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 12-36, January.
  2. Marcello D'Amato & Vincenzo Galasso, 2002. "E' la Riforma Dini Politicamente Sostenibile?," CELPE Discussion Papers 64, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
  3. Carlos Bethencourt & Vincenzo Galasso, . "On the Political Complementarity between Health Care and Social Security," Working Papers 184, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Vincenzo Galasso & Paola Profeta, 2004. "Lessons for an ageing society: the political sustainability of social security systems," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 63-115, 04.
  5. J. Ignacio Conde-Ruiz & Paola Profeta, 2007. "The Redistributive Design of Social Security Systems," Working Papers 2007-07, FEDEA.
  6. J. Ignacio Conde-Ruiz & Vincenzo Galasso & Paola Profeta, 2005. "Early Retirement and Social Security: A Long Term Perspective," CESifo Working Paper Series 1571, CESifo Group Munich.
  7. Conde-Ruiz, J. Ignacio & Galasso, Vincenzo, 2004. "The macroeconomics of early retirement," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1849-1869, August.
  8. 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.
  9. Koethenbuerger, Marko & Poutvaara, Panu & Profeta, Paola, 2008. "Why are more redistributive social security systems smaller? A median voter approach," Munich Reprints in Economics 19459, University of Munich, Department of Economics.
  10. 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.

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