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Social Security in a Classical Growth Model

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Abstract

This paper develops a growth model with overlapping generations of workers who save for life-cycle reasons and Ricardian capitalists who save from a bequest motive. The population of workers accommodates growth,so that the rate of capital accumulation is endogenous and determines the growth of employment. Two regimes are possible, one in which workers’ saving dominates the long-run and a second in which the long-run equilibrium growth rate is determined completely by the capitalist saving function, sometimes called the Cambridge equation. The second regime exhibits a version of the Pasinetti Paradox: changes in workers’ saving affect the level, but not the growth rate, of capital in the long run. Applied to social security, this result implies that an unfunded system relying on payroll taxes reduces workers’ lifetime wealth and saving, creating level effects on the capital stock without affecting its long-run growth rate. These effects are mitigated by the presence of a reserve fund, various levels of which are examined. Calibrating the model to realistic parameter values for the U.S. facilitates an interpretation of the controversies over the percentage of the national wealth originating in life-cycle saving and the effects of social security on saving. The model is offered as an analytical framework for the review of current topics in fiscal policy, in particular identifying the social security reserve fund as a potential vehicle for generating capital accumulation and effecting a progressive redistribution of wealth.

Suggested Citation

  • Thomas R. Michl & Duncan K. Foley, 2001. "Social Security in a Classical Growth Model," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2000-15, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:2000-15
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    File URL: http://www.economicpolicyresearch.org/scepa/publications/workingpapers/2000/6340038.pdf
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    Cited by:

    1. Linus Mattauch & Ottmar Edenhofer & David Klenert & Sophie Bénard, 2014. "Public Investment when Capital is Back - Distributional Effects of Heterogeneous Saving Behavior," CESifo Working Paper Series 4714, CESifo Group Munich.
    2. Soon Ryoo, 2016. "Inequality of Income and Wealth in the Long Run: A Kaldorian Perspective," Metroeconomica, Wiley Blackwell, vol. 67(2), pages 429-457, May.
    3. Sergio Cesaratto, 2008. "The Macroeconomics of the Pension Fund Reform and the case of the TFR reform in Italy," Department of Economics University of Siena 549, Department of Economics, University of Siena.
    4. Linus Mattauch & Ottmar Edenhofer & David Klenert & Sophie Bénard, 2016. "Distributional Effects of Public Investment when Wealth and Classes are Back," Metroeconomica, Wiley Blackwell, vol. 67(3), pages 603-629, July.
    5. Daniele Tavani, 2013. "Bargaining over productivity and wages when technical change is induced: implications for growth, distribution, and employment," Journal of Economics, Springer, vol. 109(3), pages 207-244, July.
    6. Luca Zamparelli, 2017. "Wealth Distribution, Elasticity of Substitution and Piketty: An ‘Anti-Dual’ Pasinetti Economy," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 927-946, November.
    7. Codrina Rada, 2012. "The Economics of Pensions. Remarks on Growth, Distribution and Class Conflict," Working Paper Series, Department of Economics, University of Utah 2012_02, University of Utah, Department of Economics.
    8. Rishabh Kumar, 2015. "Wealth accumulation and aggregate demand stagnation in a two class economy with applications to the United States," Working Papers 1526, New School for Social Research, Department of Economics.
    9. Codrina Rada, 2009. "Introducing Demographic Changes in a Model of Economic Growth and Income Distribution," Working Paper Series, Department of Economics, University of Utah 2009_01, University of Utah, Department of Economics.

    More about this item

    Keywords

    overlapping generations growth; social security; Pasinetti paradox;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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