Social Security Reform and Growth in an Overlapping Generations Economy with Heterogeneous Agents

Abstract

Considerable attention has been paid to the many problems inherent to the US Social Security system over the past several decades. This study investigates the redistributive and efficiency consequences of introducing a subsidy-based pension system in an endogenous growth setting with income and mortality inequality. My analysis suggests that both current and future generations are better off without Social Security regardless of skill level. More significantly, I find that replacing the US Social Security system with capital subsidies is Pareto optimal for all generations and skill groups for a given set of subsidy rates. The existence of income and mortality inequality reduces the range of Pareto optimal capital subsidy rates, implying that a public pension system based on capital subsidies is less costly to implement in an economy with inequality than in an economy with homogeneous agents.

Keywords: Social Security, Inequality, Growth, Demography

JEL Classification: H55, D31, E60, O40