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Equilibria with Social Security

  • BOLDRIN, Michele

    (J.L.Kellogg Graduate School of Management, Northwestern University and Universidad)

  • RUSTICHINI, Aldo

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

We model pay-as-you-go (PAYG) social security systems as the outcome of majority voting within a standard OLG model with production and an exogenous population growth rate. At each point in time individuals work, save, consume and invest by taking the social security policy as given. The latter consists of a tax on current wages transferred to elderly people. 'When they vote, individuals have to make two choices: if they want to keep the commitment made by the previous generation by paying the elderly the promised amount of benefits, and which amount they want paid to themselves next period. We show that when the growth rate of population is high enough compared to the productivity of capital there exists an equilibrium where PAYG pensions are voted into existence and maintained. PAYG systems are kept even when everybody knows that they will surely be abandoned, and that some generation will pay and not be paid back. We characterize the steady state and dynamic properties of these equilibria and study their welfare properties. Equilibria achieved by voting are typically inefficient; however, they may be so due to over accumulation, as well as, in other cases, due to under accumulation. On the other hand, the efficient steady states turn out to be dynamically unstable: so we are presenting an unpleasant alternative for policy making.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1994060.

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Date of creation: 01 Nov 1994
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Handle: RePEc:cor:louvco:1994060
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  1. Gary S. Becker & Kevin M. Murphy, . "The Family and the State," University of Chicago - Population Research Center 87-15, Chicago - Population Research Center.
  2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  3. H. Verbon, 1987. "The rise and evolution of public pension systems," Public Choice, Springer, vol. 52(1), pages 75-100, January.
  4. Tabellini, Guido, 2000. " A Positive Theory of Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 523-45, June.
  5. Tabellini, Guido, 1991. "The Politics of Intergenerational Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 335-57, April.
  6. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Introduction to "Pensions in the American Economy"," NBER Chapters, in: Pensions in the American Economy, pages 1-19 National Bureau of Economic Research, Inc.
  7. Samuelson, Paul A, 1975. "Optimum Social Security in a Life-Cycle Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 539-44, October.
  8. Laurence J. Kotlikoff, 1987. "Justifying Public Provision of Social Security," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 674-696.
  9. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Pensions in the American Economy," NBER Books, National Bureau of Economic Research, Inc, number kotl83-1, June.
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