EconPapers    
Economics at your fingertips  
 

Sustaining Social Security

Martín Gonzales-Eiras () and Dirk Niepelt ()
Additional contact information
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
References: Add references at CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
http://su.diva-portal.org/smash/get/diva2:343990/FULLTEXT01 (application/pdf)

Related works:
Working Paper: Sustaining Social Security (2007) Downloads
Working Paper: Sustaining Social Security (2005) Downloads
Working Paper: Sustaining Social Security (2004)
Working Paper: Sustaining Social Security (2004) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0731

Access Statistics for this paper

More papers in Seminar Papers from Stockholm University, Institute for International Economic Studies Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Hanna Christiansson ().

 
Page updated 2020-07-03
Handle: RePEc:hhs:iiessp:0731