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Equilibria with social security

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  • Rustichini, Aldo
  • Boldrin, Michele

Abstract

We model pay-as-you-go (PAYG) social sucurity systems as the outcome of majority voting within a standard OLG model with production and an exogenous population growth rateo 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 committment made by the previous generation by paying the elderly the promised amount of benefits, and which amount they want paid to themselves next periodo 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 abondoned, 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 overaccumulation, 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.

Suggested Citation

  • Rustichini, Aldo & Boldrin, Michele, 1995. "Equilibria with social security," UC3M Working papers. Economics 3903, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:3903
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    References listed on IDEAS

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    1. Tabellini, Guido, 2000. " A Positive Theory of Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 523-545, June.
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    Cited by:

    1. Cigno, Alessandro, 2006. "The political economy of intergenerational cooperation," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
    2. Elizabeth Caucutt & Thomas Cooley & Nezih Guner, 2013. "The farm, the city, and the emergence of social security," Journal of Economic Growth, Springer, vol. 18(1), pages 1-32, March.
    3. Costas Azariadis & Vincenzo Galasso, 1998. "Constitutional “Rules” and Intergenerational Fiscal Policy," Constitutional Political Economy, Springer, vol. 9(1), pages 67-74, March.
    4. Marcello D’Amato & Vincenzo Galasso, 2002. "Assessing the Political Sustainability of Parametric Social Security Reforms: the Case of Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(2), pages 171-213, December.
    5. Juan Carlos Conesa & carlos Carriga, 2004. "Optimal Design of Social Security Reforms," UFAE and IAE Working Papers 642.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    6. Carlos Bethencourt & Vincenzo Galasso, "undated". "On the Political Complementarity between Health Care and Social Security," Working Papers 184, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Dirk Niepelt & Martin Gonzalez-Eiras, 2008. "Economic and Politico-Economic Equivalence of Fiscal Policies," 2008 Meeting Papers 631, Society for Economic Dynamics.
    8. Juan Carlos Conesa & Carlos Garriga, 2004. "Optimal Response to a Demographic Shock," Working Papers 157, Barcelona Graduate School of Economics.
    9. Uk Hwang & Francesco Magris, 2005. "Intergenerational Conflicts and the Resource Policy Formation of a Short-Lived Government," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(III), pages 437-457, September.
    10. Giorgio Bellettini & Carlotta Berti Ceroni, 1999. "Is Social Security Really Bad for Growth?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 796-819, October.
    11. Butler, Monika, 1999. "Anticipation effects of looming public-pension reforms," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 119-159, June.
    12. Peter Zweifel, 2006. "Auftrag und Grenzen der Sozialen Krankenversicherung," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(s1), pages 5-26, May.
    13. Assaf Razin & Efraim Sadka & Benjarong Suwankiri, 2009. "Migration and the welfare state: Dynamic Political-Economy Theory," NBER Working Papers 14784, National Bureau of Economic Research, Inc.
    14. Cooley, Thomas F. & Soares, Jorge, 1996. "Will social security survive the baby boom?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 89-121, December.
    15. Francisco M. Lagos & Juan Antonio Lacomba, 2001. "Election On Retirement Age," Working Papers. Serie AD 2001-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    16. repec:aia:aiaswp:wp98 is not listed on IDEAS
    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. Mahieu, Géraldine & Rottier, Stéphane, 1998. "Pensions and Voting Equilibria in an Overlapping Generation Model with Heterogeneous Agents," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Nov 1999.
    19. repec:wop:bodewp:218 is not listed on IDEAS
    20. Montes Alonso, Ana & Boldrin, Michele, 1998. "Intergenerational transfer institutions public education and public pensions," UC3M Working papers. Economics 6148, Universidad Carlos III de Madrid. Departamento de Economía.
    21. Francisco M. Lagos & Juan Antonio Lacomba, 2000. "- Social Security And Political Election In Retirement Age," Working Papers. Serie AD 2000-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    22. Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2001. "Demographic Shock and Social Security: A Political Economy Perspective," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 417-431, August.
    23. 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.

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