The Future of Social Security

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.

[1]  Emmanuel Saez,et al.  Income inequality in the United States , 2003 .

[2]  William C. Birdsall,et al.  The Future of Social Security , 1985 .

[3]  Michele Boldrin,et al.  Political Equilibria with Social Security , 2000 .

[4]  Gene M. Grossman,et al.  Intergenerational Redistribution with Short-Lived Governments , 1996 .

[5]  Venkataraman Bhaskar.  Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems , 1994 .

[6]  Ellen R. McGrattan,et al.  Changes in hours worked, 1950?2000 , 2004 .

[7]  Torsten Persson,et al.  Political Economics and Public Finance , 1999 .

[8]  Per Krusell,et al.  Politico-economic equilibrium and economic growth , 1997 .

[9]  Thomas F. Cooley,et al.  A Positive Theory of Social Security Based on Reputation , 1999, Journal of Political Economy.

[10]  Peter H. Lindert,et al.  What Limits Social Spending , 1996 .

[11]  A. Razin,et al.  The Aging Population and the Size of the Welfare State , 2001, Journal of Political Economy.

[12]  Torsten Persson,et al.  The Economic Effects of Constitutions , 2003 .

[13]  Dirk Krueger,et al.  Social Security Reform with Heterogeneous Agents , 1999 .

[14]  Emmanuel Saez,et al.  Income inequality in the United States , 2003 .

[15]  C. Arellano.  FEDERAL RESERVE BANK OF MINNEAPOLIS , 1900 .

[16]  Martín Gonzalez-Eiras,et al.  Sustaining Social Security , 2005, SSRN Electronic Journal.

[17]  Henning Bohn.  Will social security and Medicare remain viable as the U.S. population is aging , 1999 .

[18]  J. Weibull,et al.  Balanced-budget redistribution as the outcome of political competition , 1987 .

[19]  A. Dixit,et al.  The Determinants of Success of Special Interests in Redistributive Politics , 1996, The Journal of Politics.

[20]  V. Galasso.  The U.S. Social Security System: What Does Political Sustainability Imply? , 1999 .

[21]  K. Judd,et al.  Social Security and Individual Welfare: Precautionary Saving, Liquidityconstraints, and the Payroll Tax , 1985 .

[22]  K. Judd,et al.  Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax , 1987 .

[23]  John Hassler,et al.  The Survival of the Welfare State , 2001 .

[24]  Douglas H. Joines,et al.  A life cycle analysis of social security , 1995 .

[25]  Lorenzo Forni,et al.  Social Security as Markov Equilibrium in OLG Models , 2005 .

[26]  C. Mulligan,et al.  Internationally Common Features of Public Old-Age Pensions, and Their Implications for Models of the Public Sector , 2004 .

[27]  Some Inefficiency Implication of Generational Politics and Exchange , 1990 .

[28]  Ellen R. McGrattan,et al.  Changes in Hours Worked , 2004 .

[29]  M. Boldrin,et al.  Fertility and Social Security , 2005 .

[30]  Antonio Rangel.  Forward and Backward Intergenerational Goods: Why Is Social Security Good for the Environment? , 2003 .

[31]  A. Meltzer,et al.  A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework , 1989 .

[32]  Laurence J. Kotlikoff,et al.  Dynamic Fiscal Policy , 1988 .

[33]  Peter R. Orszag,et al.  Saving Social Security , 2005 .

[34]  Charles E. Stuart,et al.  Social Security as Trade Among Living Generations , 1989 .

[35]  P. Lindert.  The Rise of Social Spending, 1880-1930 , 1994 .