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Lessons for an Aging Society: The Political Sustainability of Social Security Systems

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  • Vincenzo Galasso
  • Paola Profeta

Abstract

What is the future of social security systems in OECD countries? In our view, the answer belongs to the realm of politics. We evaluate how political constraints shape the social security system in six countries – France, Germany, Italy, Spain, the UK and the US – under population aging. Two main aspects of the aging process are relevant to the analysis. First, the increase in the dependency ratio – the ratio of retirees to workers – reduces the average profitability of the unfunded social security system, thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings. Second, an aging electorate leads to larger systems, since it increases the relevance of pension spending on the policy-makers’ agenda. The overall assessment from our simulations is that the political aspect dominates in all countries, albeit with some differences. Spain, the fastest aging country, faces the largest increase in the social security contribution rate. When labor market considerations are introduced, the political effect still dominates, but it is less sizeable. Country specific characteristics (not accounted for in our simulations), such as the degree of redistribution in the pension system and the existence of family ties in the society, may also matter. Our simulations deliver a strong policy implication: an increase in the effective retirement age always decreases the size of the system chosen by the voters, while often increasing its generosity. Finally, delegation of pension policy to the EC may reduce political accountability and hence help to reform the systems.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 244.

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Date of creation: 2003
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Handle: RePEc:igi:igierp:244

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  1. 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.
  2. Cremer, Helmuth & Pestieau, Pierre, 2002. "The Double Dividend of Postponing Retirement," IDEI Working Papers 144, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  3. 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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  5. 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.
  6. Galasso, Vincenzo & Profeta, Paola, 2002. "The political economy of social security: a survey," European Journal of Political Economy, Elsevier, vol. 18(1), pages 1-29, March.
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  17. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. "Political sustainability and the design of social insurance," Journal of Public Economics, Elsevier, vol. 75(3), pages 341-364, March.
  18. Galasso, Vincenzo, 2000. "The US Social Security: A Financial Appraisal For The Median Voter," CEPR Discussion Papers 2456, C.E.P.R. Discussion Papers.
  19. Tito Boeri & Axel Boersch-Supan & Guido Tabellini, 2002. "Pension Reforms and the Opinions of European Citizens," American Economic Review, American Economic Association, vol. 92(2), pages 396-401, May.
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  21. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
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