Sustaining Social Security

Martin Gonzalez-Eiras and Dirk Niepelt

No 199, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the sustainability of intergenerational transfers in politico-economic equilibrium. We argue that these transfers naturally arise in a Markov perfect equilibrium in the fundamental state variables. In contrast to earlier literature, our explanation does not resort to altruism, commitment, or trigger strategies but rests on the incentive for young voters to monopolize capital accumulation, as pointed out by Kotlikoff and Rosenthal (1990); transfers to the old are instrumental in that respect. Introducing fully rational voters and probabilistic voting in the standard Diamond (1965) OLG model, we find that transfers in politico-economic equilibrium are too h i g h relative to the Ramsey equilibrium. Under standard functional form assumptions, we are able to analytically solve for the steady state and the complete transition dynamics in both the Ramsey and the probabilistic voting case. Under realistic parameter values, the model predicts a social security tax rate of 12 percent, compared to a Ramsey tax rate of 3.5 percent

Keywords: Social security; intergenerational transfers; Markov perfect equilibrium; probabilistic voting; overlapping generations (search for similar items in EconPapers)
JEL-codes: E62 H55 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (6)

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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:red:sed004:199

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