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Social security in theory and practice (II): Efficiency theories, narrative theories and implications for reform

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Abstract

166 countries have some kind of public old age pension. What economic forces create and sustain old age Social Security as a public program? Mulligan and Sala-i-Martin (1999b) document several of the internationally and historically common features of social security programs, and explore "political" theories of Social Security. This paper discusses the "efficiency theories", which view creation of the SS program as a full of partial solution to some market failure. Efficiency explanations of social security include the "SS as welfare for the elderly" the "retirement increases productivity to optimally manage human capital externalities", "optimal retirement insurance", the "prodigal father problem", the "misguided Keynesian", the "optimal longevity insurance", the "government economizing transaction costs", and the "return on human capital investment". We also analyze four "narrative" theories of social security: the "chain letter theory", the "lump of labor theory", the "monopoly capitalism theory", and the "Sub-but-Nearly-Optimal policy response to private pensions theory". The political and efficiency explanations are compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan. Most of the explanations suggest that forced savings does not increase welfare, and may decrease it.

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  • Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social security in theory and practice (II): Efficiency theories, narrative theories and implications for reform," Economics Working Papers 385, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:385
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    Cited by:

    1. Casey B Mulligan, 2000. "Can Monopoly Unionism Explain Publically Induced Retirement?," University of Chicago - George G. Stigler Center for Study of Economy and State 157, Chicago - Center for Study of Economy and State.
    2. Rowena A. Pecchenino & Patricia S. Pollard, 2005. "Aging, Myopia, and the Pay-As-You-Go Public Pension Systems of the G7: A Bright Future?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 449-470, August.
    3. Gilad Sorek, 2006. "Advancing Medical Technology, Aging Population, and Economic Growth," DEGIT Conference Papers c011_046, DEGIT, Dynamics, Economic Growth, and International Trade.
    4. Mulligan Casey B & Gil Ricard & Sala-i-Martin Xavier X, 2010. "Social Security and Democracy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, March.
    5. Stefan Homburg, 2006. "Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies," Economica, London School of Economics and Political Science, vol. 73(289), pages 47-58, February.
    6. Barrientos, Armando, 2002. "Comparing Pension Schemes in Chile, Singapore, Brazil and South Africa," General Discussion Papers 30560, University of Manchester, Institute for Development Policy and Management (IDPM).
    7. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social security in theory and practice (I): Facts and political theories," Economics Working Papers 384, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Casey B Mulligan, 1999. "Gerontocracy, Retirement, and Social Security," University of Chicago - George G. Stigler Center for Study of Economy and State 154, Chicago - Center for Study of Economy and State.
    9. Bhattacharya, Joydeep & Reed, Robert, 2003. "Age-Specific Employment Policies," Staff General Research Papers Archive 10256, Iowa State University, Department of Economics.
    10. Emanuele Canegrati, 2008. "The Single Mindedness Theory Micro-foundation and Application to Labor Market," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 20.
    11. D'Orlando, Fabio & Sanfilippo, Eleonora, 2010. "Behavioral foundations for the Keynesian consumption function," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1035-1046, December.
    12. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
    13. Casey B. Mulligan & Xavier Sala-i-Martin, 2003. "Social Security, Retirement, and the Single-Mindedness of the Electorate," NBER Working Papers 9691, National Bureau of Economic Research, Inc.
    14. Canegrati, Emanuele, 2007. "On redistribution effects of public debt amongst single-minded generations," MPRA Paper 2254, University Library of Munich, Germany.
    15. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
    16. canegrati, emanuele, 2006. "The Single-Mindedness Theory: Micro-foundation and Applications to Social Security Systems," MPRA Paper 1223, University Library of Munich, Germany.
    17. Emanuele, Canegrati, 2007. "A Single-Mindedness model with n generations," MPRA Paper 2548, University Library of Munich, Germany.
    18. Pecchenino, Rowena A. & Pollard, Patricia S., 2002. "Dependent children and aged parents: funding education and social security in an aging economy," Journal of Macroeconomics, Elsevier, vol. 24(2), pages 145-169, June.
    19. Robert Fenge & Jakob Weizsäcker, 2001. "Compulsory Savings: Efficiency and Redistribution On the Interaction of Means Tested Basic Income and Public Pensions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 637-652, August.
    20. Eisen, Roland, 2000. "(Partial) privatization social security: The Chilean model - a lesson to follow?," CFS Working Paper Series 2000/13, Center for Financial Studies (CFS).

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    Keywords

    Social Security; retirement; gerontocracy; retirement incentives; political theories of Social Security;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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