| Equilibria with Social Security (1998) | |||||||||||||
Abstract | |||||||||||||
| We model pay-as-you-go (PAYG) social security systems as the outcome of majority voting within a standard OLG model with production and an exogenous growth rate of total labor productivity. At each point in time individuals work, save, consume and invest by taking the social security policy as given. The latter consists of a tax on current wages transferred to elderly people. When they vote, individuals have to make two choices: if they want to keep the committment made by the previous generation by paying the elderly the promised amount of benefits, and which amount they want paid to themselves next period. We show that, under fairly general circumstances, there exists an equilibrium where PAYG pensions are voted into existence and maintained. Our analysis uncovers two reasons for establishing a PAYG system. The traditional one, which relies on intergenerational trade and that occurs at those inecient allocations where the growth rate of population is larger than the rate of return on c... | |||||||||||||
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