Illusory Gains from Privatizing Social Security when Reform is Politically Unstable

Marcin Bielecki
  • University of Warsaw, Warsaw, Poland
  • National Bank of Poland, Warsaw, Poland
  • FAME|GRAPE, Warsaw, Poland
  • Search for other articles:
  • degruyter.comGoogle Scholar
, Krzysztof Makarski
  • National Bank of Poland, Warsaw, Poland
  • FAME|GRAPE, Warsaw, Poland
  • Warsaw School of Economics, Warsaw, Poland
  • Search for other articles:
  • degruyter.comGoogle Scholar
and Joanna Tyrowicz
  • Corresponding author
  • University of Warsaw, Warsaw, Poland
  • FAME|GRAPE, Warsaw, Poland
  • IAAEU, Trier, Germany
  • IZA, Bonn, Germany
  • Email
  • Search for other articles:
  • degruyter.comGoogle Scholar

Abstract

With compulsory funded public social security systems, pension savings constitute a large stock of assets. In this paper we consider an economy populated by overlapping generations, which may decide about abolishing the funded system and replacing it with the pay-as-you-go scheme (i.e. unprivatizing the pension system). We compare politically stable as well as politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path may turn privatizing social security politically unsustainable.

  • Breyer, F., & Craig, B. (1997). Voting on social security: Evidence from {OECD} countries. European Journal of Political Economy, 13(4), 705–724.

  • Carroll, C. D. (2006). The method of endogenous gridpoints for solving dynamic stochastic optimization problems. Economics Letters, 91(3), 312–320.

  • Conde-Ruiz, J. I., & Galasso, V. (1999). Positive arithmetic of the welfare state. Discussion Paper 2202, CEPR.

  • Conesa, J. C., & Krueger, D. (1999). Social security reform with heterogeneous agents. Review of Economic Dynamics, 2(4), 757–795.

  • Cooley, T. F., & Soares, J. (1999). Privatizing social security. Review of Economic Dynamics, 2, 731–755.

  • D’Amato, M., & Galasso, V. (2010). Political intergenerational risk sharing. Journal of Public Economics, 94(9), 628–637.

  • de Walque, G. (2005). Voting on pensions: A survey, Journal of Economic Surveys, 19(2), 181–211.

  • Demange, G. (2009). On sustainable pay-as-you-go contribution rules. Journal of Public Economic Theory, 11(4), 493–527.

  • Diamond, P. A. (1965). National debt in a neoclassical growth model. American Economic Review, 55(5), 1126–1150.

  • Diamond, P. (1993). Privatization of social security: Lessons from Chile. National Bureau of Economic Research Working Paper Series, 4510.

  • Fehr, H. (2009). Computable stochastic equilibrium models and their use in pension-and ageing research. De Economist, 157(4), 359–416.

  • Galasso, V. (2008). Postponing retirement: The political effect of aging. Journal of Public Economics, 92(10–11), 2157–2169.

  • Galasso, V., & Profeta, P. (2002). The political economy of social security: A survey. European Journal of Political Economy, 18(1), 1–29.

  • Grossman, G., & Helpman, E. (1998). Intergenerational redistribution with short-lived governments. The Economic Journal, 108(450), 1299–1329.

  • Hagemejer, J., Makarski, K., & Tyrowicz, J. (2015). Analyzing the efficiency of the pension reform: The role for the welfare effects of fiscal closures. Macroeconomic Dynamics p. forthcoming.

  • Heijdra, B. J., & Romp, W. E. (2009). Retirement, pensions, and ageing. Journal of Public Economics, 92, 586–604.

  • Hirte, G. (2003). The political feasibility of privatizing old-age insurance. Scottish Journal of Political Economy, 50(4), 507–525.

  • Hirte, G., & Weber, R. (1997). Pareto improving transition from pay-as-you-go to a fully funded system - Is it Politically Feasible, FinanzArchiv, 54, 303–330.

  • Hollanders, D. (2010). The political economy of intergenerational risk sharing. mimeo, Tilburg University, Center for Economic Research.

  • Hollanders, D., & Koster, F. (2012). The graying of the median voter. Technical report, Tilburg University, Center for Economic Research.

  • Holzman, R., & Stiglitz, J. E. (2001). New ideas about old age security. Washington, DC: World Bank.

  • Keuschnigg, C., Davoine, T., & Schuster, P. (2012). Aging and pension reform, a general equilibrium approach - Background paper for the ECA Old-Age Insurance report - Final report. mimeo, World Bank.

  • Kotlikoff, L., Smetters, K., & Walliser, J. (2007). Mitigating America’s demographics dilemma by pre-funding social security. Journal of Monetary Economics, 54, 247–266.

  • Mateos-Planas, X. (2008). A quantitative theory of social security without commitment. Journal of Public Economics, 92(3), 652–671.

  • McGrattan, E. R., & Prescott, E. C. (2013). On financing retirement with an aging population. NBER Working Paper, 18760, National Bureau of Economic Research.

  • Mulligan, C. B., & Sala-i Martin, X. (1999). Gerontocracy, retirement, and social security. NBER Working Paper, 7117.

  • Mulligan, C. B., Gil, R. & Sala-i Martin, X. X. (2010). Social security and democracy. The BE Journal of Economic Analysis & Policy, 10(1). DOI: .

    • Crossref
    • Export Citation
  • Mulligan, C. B., & Sala-i Martin, X. (2003). Social security, retirement, and the single-mindedness of the electorate. NBER Working Paper, 9691, National Bureau of Economic Research, Inc.

  • Orbán, G., & Palotai, D. (2005). The sustainability of the Hungarian pension system: A reassessment. Technical report, Magyar Nemzeti Bank (The Central Bank of Hungary).

  • Orszag, P. R., & Stiglitz, J. E. (2001). Rethinking pension reform: Ten myths about social security systems. In R. Holzman & J. E. Stiglitz (Eds.), New ideas about old age security (pp. 17–56). Washington, DC: World Bank.

  • Palmer, E. (2000). The Swedish pension reform model: Framework and issues. Social Protection Discussion Papers, 23086, The World Bank.

  • Samuelson, P. A. (1958). An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money. Journal of Political Economy, 66, 467–482.

  • Sjoblom, K. (1985). Voting for social security. Public Choice, 45(3), 225–240.

  • Tabellini, G. (2000). A positive theory of social security. The Scandinavian Journal of Economics, 102(3), 523–545.

Purchase article
Get instant unlimited access to the article.
$42.00
Price including VAT
Log in
Already have access? Please log in.


Journal + Issues

The main objectives of Peace Economics, Peace Science and Public Policy are to further research in Peace Science and Peace Economics, to expose the scholarly community to innovative peace-related research, to disseminate the study of peace economics to a wider audience.

Search