Elimination of Social Security in a Dynastic Framework

Abstract

Much of the existing literature on social security has taken the extreme assumption that individuals have little or no altruism; this paper takes an opposite assumption that there is full two-sided altruism. When households insure members that belong to the same family line, privatizing social security can gain public support. In our benchmark model calibrated to the U.S. economy, privatization without compensation is favored by 52% of the population. If social security participants are fully compensated for their contributions and the transition to privatization is financed by a combination of debt and a consumption tax, 58% experience a welfare gain. These gains and the resulting public support for social security reform depend critically on a flexible labor market. If the labor supply elasticity is low, then support for privatization disappears.

Keywords: Social security reform, Altruism, Heterogeneous agents, Welfare

JEL Classification: E6, D52, C68, H55