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Endogenous Social Security Financial Crises

Listed author(s):
  • Rodrigo Cerda


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

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.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 250.

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Date of creation: 2003
Publication status: Published as "On Endogenous Social Security Crisis", Journal of Population Economics, Vol. 18, Nº 3, pp. 509-517, 2005.
Handle: RePEc:ioe:doctra:250
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  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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