Lessons for an Aging Society: the Political Sustainability of Social Security Systems'

CORE Discussion Paper No. 2003/77

61 Pages Posted: 31 May 2007

See all articles by Vincenzo Galasso

Vincenzo Galasso

University of Lugano; Centre for Economic Policy Research (CEPR)

Paola Profeta

Bocconi University - Department of Policy Analysis and Public Management; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2003

Abstract

What is the future of social security systems in OECD countries? In our view, the answer belongs to the realm of politics. We evaluate how political constraints shape the social security system in six countries - France, Germany, Italy, Spain, the UK and the US - under population aging. Two main aspects of the aging process are relevant to the analysis. First, the increase in the dependency ratio - the ratio of retirees to workers - reduces the average profitability of the unfunded social security system, thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings. Second, an aging electorate leads to larger systems, since it increases the relevance of pension spending on the policy-makers' agenda. The overall assessment from our simulations is that the political aspect dominates in all countries, albeit with some differences. Spain, the fastest aging country, faces the largest increase in the social security contribution rate. When labor market considerations are introduced, the political effect still dominates, but it is less sizeable. Country specific characteristics (not accounted for in our simulations), such as the degree of redistribution in the pension system and the existence of family ties in the society, may also matter. Our simulations deliver a strong policy implication: an increase in the effective retirement age always decreases the size of the system chosen by the voters, while often increasing its generosity. Finally, delegation of pension policy to the EC may reduce political accountability and hence help to reform the systems.

Suggested Citation

Galasso, Vincenzo and Profeta, Paola, Lessons for an Aging Society: the Political Sustainability of Social Security Systems' (September 2003). Available at SSRN: https://ssrn.com/abstract=988654 or http://dx.doi.org/10.2139/ssrn.988654

Vincenzo Galasso (Contact Author)

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, 6900
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paola Profeta

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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