Sustaining Social Security

Martín Gonzales-Eiras () and Dirk Niepelt
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Martín Gonzales-Eiras: Universidad de San Andrés, Postal: Vito Dumas 284, B1644BID Victoria, Buenos Aires, Argentina
Authors registered in the RePEc Author Service: Martin Gonzalez-Eiras

No 731, Seminar Papers from Stockholm University, Institute for International Economic Studies

Abstract: This paper analyzes the sustainability of intergenerational transfers in politico-economic equilibrium. We argue that these transfers arise naturally in a Markov perfect equilibrium in the fundamental sate variables. In contrast to earlier literature, our explanation does not resort to altruism, commitment, or trigger strategies but rests on the incentive for young households to monopolize capital accumulation, as pointed out by Kotlikoff and Rosenthal (1990). Since transfers to the old are instrumental in that respect, the vote-maximizing platform under electoral competition sustains a large social security system. Introducing fully rational voters and probabilistic voting in the standard Diamond (1965) OLG model, we find that transfers in politico-economic equilibrium are too high relative to the social optimum. Standard functional form assumptions yield analytical solutions for both the Ramsey and the probabilistic voting case. Under realistic parameter values, the model predicts a social security tax rate of 12 percent, as compared to a Ramsey tax rate of 3.5 percent. Other predictions of the model are also consistent with the data. Analytical solutions for the case with endogenous labor supply and tax distortions show the results of the model to be robust.

Keywords: Social security; Intergenerational transfers; Markov perfect equilibrium; Probabilistic voting; Aggregate saving; Aggregate labor supply (search for similar items in EconPapers)
JEL-codes: E62 H55 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2004-06-30
New Economics Papers: this item is included in nep-pub
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Sustaining Social Security (2007)
Working Paper: Sustaining Social Security (2005)
Working Paper: Sustaining Social Security (2004)
Working Paper: Sustaining Social Security (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0731

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