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Social security reform and population ageing in a two-sector growth model

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Author Info
Groezen, B. van
Meijdam, L.
Verbon, H. (Tilburg University, Center for Economic Research)

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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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 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: overlapping generations;

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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References listed on IDEAS
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    Other versions:
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  7. Groezen, B. van & Meijdam, L. & Verbon, H., 2002. "General-equilibrium effects of privatisation : the missing piece in social security reform," Discussion Paper 24, Tilburg University, Center for Economic Research. [Downloadable!]
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