Social Security Reform in a Dynastic Life-Cycle Model with Endogenous Fertility
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
affiliation not provided to SSRN
CERGE-EI Working Paper No. 381
This paper studies the effects of a fully funded social security reform with endogenous fertility in a detailed, general equilibrium life-cycle model with dynasties whose members differ in skills and life uncertainty. We find that as high skill households tend to save relatively more in assets than in children, models with exogenous fertility underestimate the aggregate capital stock in the PAYG steady state. These models also predict that the capital stock increases after the fully funded reform. However, because the high skill households respond to the reform by having more children and investing less in assets and intergenerational transfers, the average fertility increases and the aggregate capital stock falls. The welfare gains from the elimination of social security seem to more than compensate the agents for the lost insurance against life-span and earnings risks.
Number of Pages in PDF File: 56
Keywords: fertility, social security, fiscal policy, public expenditures, taxation
JEL Classification: J13, H55, E62
Date posted: August 19, 2009
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