Social Security Regime, Growth and Income Distribution

This paper studies the role of social security on income distribution, capital accumulation and growth in a general equilibrium setup. An Overlapping Generations Model with heterogeneous agents is used. Heterogeneity is introduced by means of different abilities among individuals and non negative bequest motives. A key feature of the model is the explicit introduction of a government and its fiscal policy. The model is then used to investigate the empirical implications of different social security regimes and redistributional policies undertaken by the government on income distribution, growth, and capital accumulation. The theoretical model is calibrated in order to match some key stylized facts of Brazil and USA. The paper shows that under certain redistributional policies undertaken by the government, a pay-as-you-go system leads to more income inequality and a worse economic perfomance than a fully funded system. Another important implication of the paper is that the contradictory evidence regarding the Kuznets curve found in the empirical literature can be explained by the simultaneous relation between income distribution and level of income (one is not exogenous to the other). The relationship builds upon complex interactions between fiscal policy and the distribution of abilities of the population. Thus, the paper concludes that the Kuznets curve can have any arbitrary shape at a theoretical level, and the inverted U shape is only compatible with a particular realization of fiscal policies.