Growth and Welfare Implications of Mortality Differentials in Unfunded Social Security Systems

38 Pages Posted: 19 Nov 2020 Last revised: 2 Aug 2021

Date Written: July 7, 2021

Abstract

Several recent studies have examined the steady-state welfare implications of mortality differentials within unfunded Social Security systems, concluding that these differentials undermine the progressivity of the system and make society worse-off relative to alternative public pension schemes. This study is the first to systematically investigate the long-run implications of mortality inequality within the U.S. Social Security system. Utilizing an OLG endogenous growth model of the U.S. economy, I compare the current pay-as-you-go (PAYG) system to versions of the model without either mortality differentials or income inequality. I find that the assumption of mortality homogeneity biases the equilibrium growth rate and welfare analysis. The PAYG system is also compared to a fully funded system based on capital subsidies. The model predicts that PAYG suppresses growth and that, for a given range of subsidy rates, the fully funded system Pareto dominates PAYG in both the medium-run and the long-run.

Keywords: Social Security, Inequality, Growth, Demography

JEL Classification: H55, D31, E60, O40

Suggested Citation

Kelly, Mark, Growth and Welfare Implications of Mortality Differentials in Unfunded Social Security Systems (July 7, 2021). Available at SSRN: https://ssrn.com/abstract=3707384 or http://dx.doi.org/10.2139/ssrn.3707384

Mark Kelly (Contact Author)

Baylor University ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States

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