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A Positive Theory of the Income Redistributive Focus of Social Security

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  • Bhattacharya, Joydeep
  • Reed, Robert

Abstract

Many countries around the world have large public pension programs. Traditionally, these programs have been used to induce retirement by the elderly in order to free up jobs for the young and to redistribute income across generations. This paper provides an efficiency rationale for the inter-generational income redistribution focus of such programs in a framework which explicitly accounts for the role of the lifecycle as well as search and matching frictions in the labor market. In our model, public pension programs alter the age composition of the labor force by inducing the jobless elderly to retire. By requiring a long history of labor market attachment in order to receive benefits, these programs raise the future value of current employment for the young which serves to redistribute bargaining power, and hence income, from the young to the old. The paper argues that pension programs through their effect on the wage structure, the age distribution of the labor force and firm entry decisions, can improve the operation of the labor market and might therefore be desirable on efficiency grounds alone (abstracting from equity and insurance motives). It shows that a pension program that is funded from within the economy can lead to higher welfare than having no pension program at all.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p1813-2003-07-25.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10681.

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Date of creation: 25 Jul 2003
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Handle: RePEc:isu:genres:10681

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Related research

Keywords: pensions; search; labor market efficiency; unemployment; lifecycle;

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  1. Joydeep Bhattacharya & Casey B. Mulligan & Robert R. Reed, 2004. "Labor Market Search and Optimal Retirement Policy," Economic Inquiry, Western Economic Association International, vol. 42(4), pages 560-571, October.
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Cited by:
  1. Juergen Jung, 2008. "The Timing of Redistribution," Caepr Working Papers 2008-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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