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Private versus Public Old-Age Security

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  • Richard C. Barnett
  • Joydeep Bhattacharya
  • Mikko Puhakka

Abstract

We compare, head on, two intergenerational institutions, a family compact – a parent makes a transfer to her parent in anticipation of a possible future gift from her children – with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system – as the experience of Europe, circa 1880s, would suggest – this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_043.

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Length: 25 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:deg:conpap:c017_043

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Keywords: fertility; family compacts; social security; intergenerational cooperation; pensions; self-enforcing constitutions;

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References

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  2. Michele Boldrin & Larry E. Jones, 2002. "Mortality, Fertility, and Saving in a Malthusian Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 775-814, October.
  3. Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," Staff Report 359, Federal Reserve Bank of Minneapolis.
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  17. Kandori, Michihiro, 1992. "Repeated Games Played by Overlapping Generations of Players," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 81-92, January.
  18. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
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