TY - JOUR

T1 - The future of social security

AU - Gonzalez-Eiras, Martin

AU - Niepelt, Dirk

N1 - JEL classification: E62; H55

PY - 2008/3

Y1 - 2008/3

N2 - We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the Diamond (1965) OLG model, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16 percent; other policies that distort labor supply will become less important; and in contrast with frequently voiced fears, labor supply therefore will rise.

AB - We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the Diamond (1965) OLG model, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16 percent; other policies that distort labor supply will become less important; and in contrast with frequently voiced fears, labor supply therefore will rise.

KW - Faculty of Social Sciences

KW - social security

KW - Markov-perfect equilibrium

KW - probabilistic voting

KW - saving

KW - labor supply

M3 - Journal article

VL - 55

SP - 197

EP - 218

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

SN - 0304-3932

IS - 2

ER -