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The Extension of Social Security Coverage in Developing Countries

  • Juergen Jung


    (Department of Economics, Towson University)

  • Chung Tran


    (Research School of Economics, The Australian National University)

We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risk. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.

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Paper provided by Towson University, Department of Economics in its series Working Papers with number 2011-06.

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Length: 48 pages
Date of creation: Nov 2011
Date of revision: Nov 2011
Handle: RePEc:tow:wpaper:2011-06
Contact details of provider: Postal: Towson, Maryland 21252-0001
Phone: 410-704-2959
Fax: 410-704-3424
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