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A Positive Theory of Social Security

  • Sala-i-Martin, Xavier

Social Security programmes around the world link public pensions to retirement: people do not lose their pensions if they make a million dollars a year in the stock market, but they do confront marginal tax rates of up to 100% if they choose to work. After arguing that most existing theories cannot explain this fact, I construct a positive theory which is consistent with it. The main idea is that pensions are a means to induce retirement, that is, to buy the elderly out of the labour force. The reason is that aggregate output is higher if the elderly do not work. This is modelled through positive externalities in the average stock of human capital: because skills depreciate with age, the elderly have lower than average skills and, as a result, they have a negative effect on the productivity of the young. When the difference between the skill level of the young and that of the old is large enough, aggregate ouput in an economy where the elderly do not work is higher. Retirement is desirable in this case, and social security transfers are the means by which such retirement is induced. The theory developed in this paper is also shown to be consistent with a number of other regularities.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1025.

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Date of creation: Sep 1994
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Handle: RePEc:cpr:ceprdp:1025
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  1. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. Jaffe, Adam B & Trajtenberg, Manuel & Henderson, Rebecca, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 577-98, August.
  4. Michael J. Boskin & John B. Shoven, 1987. "Concepts and Measures of Earnings Replacement During Retirement," NBER Chapters, in: Issues in Pension Economics, pages 113-146 National Bureau of Economic Research, Inc.
  5. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Working Papers 1510, National Bureau of Economic Research, Inc.
  6. Eric J. Bartelsman & Ricardo J. Caballero & Richard K. Lyons, 1991. "Short and Long Run Externalities," NBER Working Papers 3810, National Bureau of Economic Research, Inc.
  7. Mulligan, Casey B & Sala-i-Martin, Xavier, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 739-73, August.
  8. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, December.
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