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Endogenous Social Security Financial Crises

Author

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  • Rodrigo Cerda

    () (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

This paper addresses the causes and dynamics of pay-as-you-go social security financial crises. Its main hypothesis is there exists a self-reinforcing vicious circle between the social security system, the fertility rate and labor supply. We argue that changes in the pay-as-you-go social security tax rate may induce a subsequent demographic transition and a decline in supply of labor. Theses effects cause the system to be unsustainable, as fewer individuals pay social security taxes but more individuals receive social security benefits over time. A direct policy implication is that governments are required to adjust either the tax rate and/or the benefits of the social security system. Further, we show that when the government maintains its promised payments of benefits, the social security tax rate will follow a unit-root process that grows through time. We test our predictions concerning the fertility rate and labor supply by using the case of Chile as an experiment. The empirical analysis shows support for our hypotheses concerning fertility rate and labor supply. Later, we show evidence of a unit-root process in the social security tax rate by using data from a number of OECD countries.

Suggested Citation

  • Rodrigo Cerda, 2003. "Endogenous Social Security Financial Crises," Documentos de Trabajo 250, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:250
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    File URL: http://www.economia.uc.cl/docs/dt_250.pdf
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    References listed on IDEAS

    as
    1. Zhang, Jie, 1995. "Social security and endogenous growth," Journal of Public Economics, Elsevier, vol. 58(2), pages 185-213, October.
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    More about this item

    Keywords

    Social security financial crises; demographic transition;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth

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