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A positive theory of social security

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Abstract

Social Security programmes around the world link public pensions to retirement: people do not lose their pensions if they make a million dollars a year in the stock market, but they do confront marginal tax rates of up to 100% if they choose to work. After arguing that most existing theories cannot explain this fact, I construct a positive theory which is consistent with it. The main idea is that pensions are a means to induce retirement, that is, to buy the elderly out of the labour force. The reason is that aggregate output is higher if the elderly do not work. This is modelled through positive externalities in the average stock of human capital: because skills depreciate with age, the elderly have lower than average skills and, as a result, they 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 ouput in an economy where the elderly do not work is higher. Retirement is desirable in this case, and social security transfers are the means by which such retirement is induced. The theory developed in this paper is also shown to be consistent with a number of other regularities.
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  • Xavier Sala-i-Martin, 1995. "A positive theory of social security," Economics Working Papers 108, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:108
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    3. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
    4. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, pages 739-773.
    5. 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.
    6. Michael J. Boskin & John B. Shoven, 1987. "Concepts and Measures of Earnings Replacement During Retirement," NBER Chapters,in: Issues in Pension Economics, pages 113-146 National Bureau of Economic Research, Inc.
    7. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, January.
    8. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters,in: Issues in Pension Economics, pages 283-340 National Bureau of Economic Research, Inc.
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    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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