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A Positive Theory of Social Security

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  • Guido Tabellini

Abstract

In many countries. social security is a large fraction of the government budget. Why is it, given that at any moment in time the number of recipients of social security benefits is smaller than the number of contributors? Kore generally, what determines the size of social security? To answer these questions, this paper studies an overlapping generations model in which all individuals currently alive vote on social security. There is no commitment to preserve the legislation inherited from the past. Voters are weakly altruistic and there is heterogeneity within each generation. The paper shows that in equilibrium the size of social security is larger the greater is the proportion of elderly people in the population, and the greater is the inequality of pretax income. Both predictions of the theory are supported by the empirical evidence in cross-country data.

Suggested Citation

  • Guido Tabellini, 1990. "A Positive Theory of Social Security," NBER Working Papers 3272, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3272
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    1. Boskin, Michael J. & Kotlikoff, Lawrence J. & Puffert, Douglas J. & Shoven, John B., 1986. "Social Security: A Financial Appraisal Across and Within Generations," CEPR Publications 244432, Stanford University, Center for Economic Policy Research.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Loewy, Michael B., 1988. "Equilibrium policy in an overlapping generations economy," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 485-499.
    4. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-330, March.
    5. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    6. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-677, September.
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