On the long-term macroeconomic effects of social spending in the United States

Abstract

We estimate the long-term impact of changes in social security and social protection spending on economic performance in the United states. We estimate a VAR model relating GDP, unemployment rates, saving rates and social spending. Our results suggest that social spending has significant distortionary effects in the labour markets as measured by its long-term effects on the unemployment rate, which translate into a detrimental effect on long-term output, this despite a positive, albeit small, effect on the gross savings rate. There are important policy implications of these results. If one considers the systems as they are, any further expansion in their generosity would have detrimental long-term effects. These detrimental effects, however, are neither an indictment of social spending nor evidence against extension of benefits. What they highlight is the need to carefully consider the financing mechanisms currently used and the need to align benefits and contributions in the pension component of social security and the need to find a tax revenue mix that is less distortionary for the unfunded benefits.

Keywords:

• social spending
• unemployment
• saving
• output

JEL Classification:

• C32
• H55

Acknowledgements

We would like to thank Rui Pereira for very helpful comments and suggestions.