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Lessons for an aging society: the political sustainability of social security systems

  • GALASSO, Vincenzo
  • PROFETA, Paola

What is the future of social systems in OECD countries ? In our view, the answer belongs to the realm of politics. We evaluate how political constraints shape the social security system in six countries - France, Germany, Italy, Spain, the UK and the US - under population aging. Two main aspects of the aging process are relevant to the analysis. First, the increase in the dependency ratio - the ratio of retirees of workers - reduces the average profitability of the unfunded social security system, thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings. Second, an aging electorate leads to larger systems, since it increases the relevance of pension spending on the policy-makers' agenda. The overall assessment from our simulations is that the political aspect dominates in all countries, albeit with some differences. Spain, the fastest aging country, faces the largest increase in the social security contribution rate. When labor market considerations are introduced, the political effect still dominates, but it is less sizeable. Country specific characteristics (not accounted for in our simulations), such as the degree of redistribution in the pension system and the existence of family ties in the society, may also matter. Our simulations deliver a strong policy implication: an increase in the effective retirement age always decreases the size of the system chosen by the voters, while often increasing its generosity. Finally, delegation of pension policy to the EC may reduce political accountability and hence help to reform the systems.

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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 2003077.

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Date of creation: 00 Oct 2003
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Handle: RePEc:cor:louvco:2003077
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  1. Cremer, Helmuth & Pestieau, Pierre, 2002. "The Double Dividend of Postponing Retirement," IDEI Working Papers 144, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  2. Galasso, Vincenzo & Profeta, Paola, 2002. "The political economy of social security: a survey," European Journal of Political Economy, Elsevier, vol. 18(1), pages 1-29, March.
  3. 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.
  4. CREMER, Helmuth & PESTIEAU, Pierre, . "Reforming our pension system: is it a demographic, financial or political problem?," CORE Discussion Papers RP -1468, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  7. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. "Political sustainability and the design of social insurance," Journal of Public Economics, Elsevier, vol. 75(3), pages 341-364, March.
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  9. J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2003. "Early Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 12-36, January.
  10. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, Retirement, and Social Security," NBER Working Papers 7117, National Bureau of Economic Research, Inc.
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  15. D'Amato, Marcello & Galasso, Vincenzo, 2002. "Assessing the Political Sustainability of Parametric Social Security Reforms: The Case of Italy," CEPR Discussion Papers 3439, C.E.P.R. Discussion Papers.
  16. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  17. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
  18. J. Ignacio Conde Ruiz & Paola Profeta, 2004. "What Social Security: Beveridgean or Bismarckian?," 2004 Meeting Papers 317, Society for Economic Dynamics.
  19. Diamond, Peter A., 2002. "Social Security Reform," OUP Catalogue, Oxford University Press, number 9780199247899.
  20. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
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