In this paper we investigate why and to what extent the government should have a social security trust fund, and how it should manage the fund in the face of demographic shocks, based on a simple overlapping-generations model. We show that, given an aging population, a trust fund in some form could achieve the (modified) golden rule or to offset the negative income effect of a PAYGO system. Besides, in a closed economy where factor-prices effects dominate, using the trust fund as a buffer for demographic shocks could lead to a widening of intergenerational inequality. We also the discuss policy implications of our analysis on the social security reform debate in Japan, including the fixed tax method and the use of the trust fund in the face of a rapidly aging population.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10444.
Length: Date of creation: Apr 2004 Date of revision: Handle: RePEc:nbr:nberwo:10444
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Find related papers by JEL classification: H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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