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Sustaining Social Security

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  • Martin Gonzalez-Eiras
  • Dirk Niepelt

Abstract

We analyze the sustainability of intergenerational transfers in politico-economic equilibrium. We argue that these transfers naturally arise in a Markov perfect equilibrium in the fundamental state variables. In contrast to earlier literature, our explanation does not resort to altruism, commitment, or trigger strategies but rests on the incentive for young voters to monopolize capital accumulation, as pointed out by Kotlikoff and Rosenthal (1990); transfers to the old are instrumental in that respect. Introducing fully rational voters and probabilistic voting in the standard Diamond (1965) OLG model, we find that transfers in politico-economic equilibrium are too h i g h relative to the Ramsey equilibrium. Under standard functional form assumptions, we are able to analytically solve for the steady state and the complete transition dynamics in both the Ramsey and the probabilistic voting case. Under realistic parameter values, the model predicts a social security tax rate of 12 percent, compared to a Ramsey tax rate of 3.5 percent

Suggested Citation

  • Martin Gonzalez-Eiras & Dirk Niepelt, 2004. "Sustaining Social Security," 2004 Meeting Papers 199, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:199
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    Cited by:

    1. Gonzalez-Eiras, Martín & Niepelt, Dirk, 2012. "Ageing, government budgets, retirement, and growth," European Economic Review, Elsevier, vol. 56(1), pages 97-115.
    2. Elizabeth Caucutt & Thomas Cooley & Nezih Guner, 2013. "The farm, the city, and the emergence of social security," Journal of Economic Growth, Springer, vol. 18(1), pages 1-32, March.
    3. J. Ignacio Conde-Ruiz & Vincenzo Galasso & Paola Profeta, "undated". "The Evolution of Retirement," Working Papers 2005-03, FEDEA.
    4. Dirk Niepelt, 2018. "Dynamic Tax Externalities and the U.S. Fiscal Transformation in the 1930s," Diskussionsschriften dp1803, Universitaet Bern, Departement Volkswirtschaft.
    5. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2012. "Rotten Parents and Disciplined Children: A Politico‐Economic Theory of Public Expenditure and Debt," Econometrica, Econometric Society, vol. 80(6), pages 2785-2803, November.
    6. Olovsson, Conny, 2004. "The Welfare Gains of Improving Risk Sharing in Social Security," Seminar Papers 728, Stockholm University, Institute for International Economic Studies.
    7. Dirk Niepelt & Martin Gonzalez-Eiras, 2010. "Internal Migrations and Decentralization of Public Investment," 2010 Meeting Papers 737, Society for Economic Dynamics.
    8. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
    9. J. Ignacio Conde-Ruiz & Vincenzo Galasso & Paola Profeta, 2005. "Early Retirement and Social Security: A Long Term Perspective," CESifo Working Paper Series 1571, CESifo.

    More about this item

    Keywords

    Social security; intergenerational transfers; Markov perfect equilibrium; probabilistic voting; overlapping generations;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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