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Social Security Reform in a Dynastic Life-Cycle Model with Endogenous Fertility

  • Radim Bohacek
  • Volha Belush

This paper studies the effects of a fully funded social security reform with endogenous fertility in a detailed, general equilibrium life-cycle model with dynasties whose members differ in skills and life uncertainty. We find that as high skill households tend to save relatively more in assets than in children, models with exogenous fertility underestimate the aggregate capital stock in the PAYG steady state. These models also predict that the capital stock increases after the fully funded reform. However, because the high skill households respond to the reform by having more children and investing less in assets and intergenerational transfers, the average fertility increases and the aggregate capital stock falls. The welfare gains from the elimination of social security seem to more than compensate the agents for the lost insurance against life-span and earnings risks.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp381.

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Date of creation: Jan 2009
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Handle: RePEc:cer:papers:wp381
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  1. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
  2. Oded Galor & David N. Weil, 1993. "The Gender Gap, Fertility, and Growth," NBER Working Papers 4550, National Bureau of Economic Research, Inc.
  3. Nishimura, Kazuo & Zhang, Junsen, 1992. "Pay-as-you-go public pensions with endogenous fertility," Journal of Public Economics, Elsevier, vol. 48(2), pages 239-258, July.
  4. Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
  5. Barro, R.J. & Becker, G.S., 1988. "Fertility Choice In A Model Of Economic Growth," University of Chicago - Economics Research Center 88-8, Chicago - Economics Research Center.
  6. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  7. Juan Carlos Conesa & Carlos Garriga, 2007. "Optimal fiscal policy in the design of Social Security reforms," Working Papers 2007-035, Federal Reserve Bank of St. Louis.
  8. Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," NBER Working Papers 11146, National Bureau of Economic Research, Inc.
  9. Luisa Fuster & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "Elimination of Social Security in a Dynastic Framework," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 113-145.
  10. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 1999. "Social Security in an Overlapping Generations Economy with Land," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 638-665, July.
  11. Larry E. Jones & Alice Schoonbroodt, 2010. "Complements Versus Substitutes And Trends In Fertility Choice In Dynastic Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 671-699, 08.
  12. Deaton, Angus S & Muellbauer, John, 1986. "On Measuring Child Costs: With Applications to Poor Countries," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 720-44, August.
  13. Fernando Alvarez, 1999. "Social Mobility: The Barro-Becker Children Meet the Laitner-Loury Dynasties," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 65-103, January.
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