AGING, RETIREMENT AND SOCIAL SECURITY IN A MODEL OF INTEREST GROUPS

Abstract

What is the influence of aging on the duration of retirement and on social security transfers? A model of political economy permits to investigate the duration of retirement and the social security transfer at equilibrium with the total number of elderly. In an overlapping generation model with interest groups, an increase in the proportion of elderly tends to increase the total social security transfers. However, if the pressure exerted by a group is described by a function with decreasing marginal returns to size, an increase in the number of elderly decreases the duration of retirement and may decrease the per head social security transfer.

Keywords:

• pressure groups
• political economy
• duration of retirement
• social security transfer

I thank Vincenzo Galasso, Michael Reiter, Xavier Sala-i-Martin, two anonymous referees, participants at Universitat Pompeu Fabra Macroeconomic seminars, the 1999 conference of the European Economic Association, the 2002 conference of the European Public Choice Society, the 2002 Conference of the European Society for Population Economics, the 2002 conference of the Association for Public Economic Theory, the 2002 Conference of Caisse des Dépôts – Bordeaux, the 2002 Conference of the Association of Southern European Economic Theory. All remaining errors are mine. Financial support from Fundación BBVA and Fundación Ramon Areces is gratefully acknowledged.

Notes

¹I assume that pressure depends only on leisure time and on the size of the group, since I focus on general transfers among generations rather than on targeting specific groups. Economic and social positions are however important in the intensity of pressure: minor but very active groups can exert high pressure because they control vital points such as energy and transport. These considerations are however beyond the scope of this paper.

² .

³ Romer (1996) and Wilensky (1975) analyze the persistence of government programs.

⁴The uniqueness of the optimal tax rate relies on the linearity of the group's budget constraint in l _j .

⁵The results hold true if wages of the old are assumed lower than wages of the young. The lower labor productivity of the old can be justified by the accumulation of human capital in young age and by its depreciation in old age. In Mulligan (1998), this hypothesis is supported by cross-sectional age-average hourly earnings. Mulligan and Sala-i-Martin (1999) argue that the labor productivity of the old is lower than what age-earnings profile often suggest, due to Lazear-type (1979) long-term employment contracts, which imply that earnings are not just payment for labor services rendered at the time, but also a return on past investment. Kotlikoff and Gokhale (1992) provide estimations supporting this hypothesis.