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Social Security Reform and Population Ageing in a Two-Sector Growth Model

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  • Groezen, B.J.A.M. van
  • Meijdam, A.C.
  • Verbon, H.A.A.

    (Tilburg University, Center for Economic Research)

Abstract

This paper analyses the effects of reducing unfunded social security and population ageing on economic growth and welfare, both for a small open economy and for a closed economy.The economy consists of a service sector and a commodity sector.Productivity growth only occurs in the latter sector and is assumed to depend positively on its size.It is shown that if old agents mainly demand labour intensive services, a decrease of the pay-as-you-go (PAYG) pension scheme reduces long-run growth and thus welfare in a small open economy, whereas current generations are better off.However, reducing social security raises productivity growth in a closed economy, both in the short and long run. Furthermore, ageing will lead to a lower long-run rate of economic growth in a small open economy, whereas in the short run, the effects depend on the type of ageing and the size of the PAYG-scheme.In a closed economy, the effects of ageing depend on the substitutability of labour and capital.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-25.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200225

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Related research

Keywords: economic growth; welfare; social security; pensions; privatization; ageing; population dynamics; overlapping generations;

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