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Sustaining Social Security

Martin Gonzalez Eiras () and Dirk Niepelt ()
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Martin Gonzalez Eiras: Department of Economics, Universidad de San Andres

Authors registered in the RePEc Author Service: Martin Gonzalez-Eiras ()

No 72, Working Papers from Universidad de San Andres, Departamento de Economia

Abstract: This paper analyzes the sustainability of intergenerational transfers in politico-economic equilibrium. We argue that this transfers arise naturally in a Markow 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 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 assuptions yield analitical 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 shows the results of the model to be robust.

Keywords: social security; intergenerational transfers; Markov perfect equilirbium; probabilistic voting; aggregate saving; aggregate labor supply. (search for similar items in EconPapers)
JEL-codes: E62 H55 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-06, Revised 2004-06
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https://webacademicos.udesa.edu.ar/pub/econ/doc72.pdf First version, 2004 (application/pdf)

Related works:
Working Paper: Sustaining Social Security (2007) Downloads
Working Paper: Sustaining Social Security (2004) Downloads
Working Paper: Sustaining Social Security (2004)
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