The future of social security
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The future of social security. / Gonzalez-Eiras, Martin; Niepelt, Dirk.
In: Journal of Monetary Economics, Vol. 55, No. 2, 03.2008, p. 197-218.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - The future of social security
AU - Gonzalez-Eiras, Martin
AU - Niepelt, Dirk
N1 - JEL classification: E62; H55
PY - 2008/3
Y1 - 2008/3
N2 - 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 Diamond (1965) OLG model, 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 percent; other policies that distort labor supply will become less important; and in contrast with frequently voiced fears, labor supply therefore will rise.
AB - 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 Diamond (1965) OLG model, 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 percent; other policies that distort labor supply will become less important; and in contrast with frequently voiced fears, labor supply therefore will rise.
KW - Faculty of Social Sciences
KW - social security
KW - Markov-perfect equilibrium
KW - probabilistic voting
KW - saving
KW - labor supply
M3 - Journal article
VL - 55
SP - 197
EP - 218
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
SN - 0304-3932
IS - 2
ER -
ID: 46840941