Private Versus Public Old-Age Security

28 Pages Posted: 5 Sep 2012

See all articles by Richard C. Barnett

Richard C. Barnett

Drexel University - Department of Economics & International Business

Joydeep Bhattacharya

Iowa State University - Department of Economics

Mikko Puhakka

University of Oulu - Department of Economics, Accounting and Finance

Date Written: September 2, 2012

Abstract

We compare two institutions head on, a family compact – a parent makes a transfer to her parent in anticipation of a possible future gift from her children – with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist; indeed, the former may be preferred. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system – as the experience of Europe, circa 1880s, would suggest – this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system.

Keywords: fertility, Social Security, pensions, family compacts, intergenerational cooperation, self-enforcing constitutions

JEL Classification: E21, E32

Suggested Citation

Barnett, Richard C. and Bhattacharya, Joydeep and Puhakka, Mikko, Private Versus Public Old-Age Security (September 2, 2012). Available at SSRN: https://ssrn.com/abstract=2141358 or http://dx.doi.org/10.2139/ssrn.2141358

Richard C. Barnett

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Mikko Puhakka

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014 University of Oulu
Finland

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