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  • Xavier Sala-i-Martin

In this paper I develop a positive theory of intergenerational transfers. I argue that transfers are a means to induce retirement. that is, to buy the elderly out of the labor force. The reason why societies choose to do such a thing is that aggregate output is higher if the elderly do not work. I model this idea through positive externalities in the average stock of human capital: because skills depreciate with age. one implication of these externalities is that the elderly have a negative effect on the productivity of the young. When the difference between the skill level of the young and that of the old is large enough, aggregate output in an economy where the elderly do not work is higher. Retirement in this case will be a good thing; pensions are just the means by which such retirement is induced. Unlike other theories of transfers. the theory in this paper is consistent with a number of regularities: transfers appear to be a luxury good that societies buy only after they reach a certain level of development and income: transfers are the only component of public spending that appear to be positively correlated with growth in a cross-section of countries; and transfers are linked to retirement and to the employment history of the worker. One key prediction of the model is that if the dependency ratio keeps rising, then the social security system will collapse, and that this will be the optimal thing to happen. Finally, a strict interpretation of the model would suggest that transfers to poor people, minimum wage laws. minimum working-age requirements and other types of public welfare serve the same purpose as old age social security; they keep workers possessing low human capital out of the labor force.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4186.

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Date of creation: Oct 1992
Date of revision:
Handle: RePEc:nbr:nberwo:4186
Note: EFG
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  1. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  2. Buiter, Willem H. & Kletzer, Kenneth, 1991. "Persistent Differences in National Productivity Growth Rates with a Common Technology and Free Capital Mobility," CEPR Discussion Papers 542, C.E.P.R. Discussion Papers.
  3. Casey B. Mulligan & Xavier Sala-i-Martin, 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," NBER Working Papers 3986, National Bureau of Economic Research, Inc.
  4. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  5. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  6. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  7. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  8. Laurence J. Kotlikoff & David A. Wise, 1984. "The Incentive Effects of Private Pension Plans," NBER Working Papers 1510, National Bureau of Economic Research, Inc.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  11. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May.
  12. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  13. Martin Feldstein, 1985. "Should Social Security Be Means Tested?," NBER Working Papers 1775, National Bureau of Economic Research, Inc.
  14. Eric J. Bartelsman & Ricardo J. Caballero & Richard K. Lyons, 1991. "Short and Long Run Externalities," NBER Working Papers 3810, National Bureau of Economic Research, Inc.
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