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Endogenous Social Security

Elizabeth Caucutt () and Thomas Cooley

No 220, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate why social security arose when it did in the United States to replace family based old-age care. We hypothesize that increases in life-expectancy (conditional on reaching adulthood) interrupted the traditional familial transfer of land on the farm and also led to crowding of that fixed factor, which in turn led to rural-urban migration and political support for social security. To address these issues we construct a simple, two-sector (farm and city), three-period, overlapping generations model with a probability of death between the second and third period. Output on the farm is produced using labour, capital, and a fixed factor land. Land is passed down a generation upon death. A young farmer?s life-time utility is decreasing in life expectancy because as people live longer, his wage falls and his inheritance is pushed into the future. Output in the city is produced with labour and capital. A social security system that imposes a lump sum tax on the young and middle-age and provides a lump sum transfer for the surviving old is voted on each period. We assume that the tax rate that wins a majority is implemented. There is little support for social security on the farm because of the promise of the land inheritance when old. However, middle-aged city workers favour social security because they get no inheritance, and it is a way of extracting resources from the young. If we assume that young farmers are mobile and choose to stay on the farm or move to the city based on expected lifetime utility, we can show that when life expectancy rises, people move from the farm to the city. As a result of this migration, the identity of the median voter changes from a middle-aged farmer to a middle-aged city worker, and we see social security arise.

Keywords: social security; rural-urban migration (search for similar items in EconPapers)
JEL-codes: H55 (search for similar items in EconPapers)
Date: 2004
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