Political and Economic Forces Sustaining Social Security

with Xavier Sala-i-Martin


What economic forces create and sustain old-age Social Security as a public program? We present political, efficiency, and narrative theories of Social Security and relate them to the empirical results reported in our companion paper “Internationally Common Features of Public Old-Age Pensions.” Political theories model SS as the outcome of a redistributive struggle among groups. We present two types: rational majority voting and pressure group theories. “Efficiency theories,” which model SS as a full or partial solution to some market failure, include optimal redistribution or risk sharing, internalizing human capital spillovers, optimal retirement insurance, alleviating labor market congestion, reforming prodigal fathers, optimal longevity insurance, administrative scale economies, return on human capital investment, and inducing dynamic efficiency. Finally we analyze three “narrative” theories: chain letter, monopoly capitalism, and Sub-but-Nearly-Optimal policy response to private pensions.

Overall, retirement, and not alleviating poverty, seems important at the margin, which means that plans to reduce intergenerational redistribution may not be politically sustainable merely because they provide “adequate” incomes for the elderly. Politics seem important, because cross-cohort redistribution is so readily seen in SS programs around the world, even when the old are consuming as much or more than do the young. SS reform would therefore be assisted by political reforms equalizing political power across generations.

Now published in Advances in Economic Analysis and Policy:

© copyright 1997-2004 by Casey B. Mulligan and Xavier Sala-i-Martin.