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Political Equilibria with Social Security

  • Michele Boldrin

    (University of Minnesota and CEPR)

  • Aldo Rustichini

    (Boston University)

We model PAYG social security systems as the outcome of majority voting within a OLG model with production. When voting, individuals make two choices: pay the elderly their pensions or default. which amount to promise themselves next period. Under general circumstances, there exist equilibria where pensions are voted into existence and maintained. Our analysis uncovers two reason for this. The traditional one relies on intergenerational trade and occurs at inefficient equilibria. A second reason relies on the monopoly power of the median voter. It occurs when a reduction in current savings induces a large enough increase in future return on capital to compensate for the negative effect of the tax. We characterize the steady state and dynamic properties of these equilibria and study their welfare properties. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1999.0072
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 1 (January)
Pages: 41-78

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Handle: RePEc:red:issued:v:3:y:2000:i:1:p:41-78
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  1. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  2. BOLDRIN, Michele & RUSTICHINI, Aldo, 1994. "Equilibria with Social Security," CORE Discussion Papers 1994060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  15. Vincenzo Galasso, 1999. "The US Social Security System: What Does Political Sustainability Imply?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 698-730, July.
  16. Salant, David J., 1991. "A repeated game with finitely lived overlapping generations of players," Games and Economic Behavior, Elsevier, vol. 3(2), pages 244-259, May.
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