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Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from the International Experience

  • Isaac Ehrlich
  • Jinyoung Kim

The worldwide problem with pay-as-you-go (PAYG) social security systems isn't just financial. This study indicates that these systems may have exerted adverse effects on key demographic factors, private savings, and long-term growth rates. Through a comprehensive endogenous-growth model where human capital is the engine of growth, family choices affect human capital formation, and family formation itself is a choice variable, we show that social security taxes and benefits can create adverse incentive effects on family formation and subsequent household choices, and that these effects cannot be fully neutralized by counteracting intergenerational transfers within families. We implement the model using calibrated simulations as well as panel data from 57 countries over 32 years (1960-92). We find that PAYG tax measures account for a sizeable part of the downward trends in family formation and fertility worldwide, and for a slowdown in the rates of savings and economic growth, especially in OECD countries.

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File URL: http://www.nber.org/papers/w11121.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11121.

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Date of creation: Feb 2005
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Publication status: published as "Social security and demographic trends: Theory and evidence from the international experience", Review of Economic Dynamics, Volume 10, Issue 1, January 2007, Pages 55-77
Handle: RePEc:nbr:nberwo:11121
Note: AG PE
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