Lessons for an aging societyThe political sustainability of Social Security systems

Lessons for an aging society

The political sustainability of Social Security systems

Galasso

Vincenzo

Galasso, Vincenzo

Author

Profeta

Paola

Profeta, Paola

Author

text

working paper

Chestnut Hill, Mass. Center for Retirement Research at Boston College20042004monographic

Chestnut Hill, Mass.

Center for Retirement Research at Boston College

2004

monographic

Englisheng

English

eng

electronicapplication/pdfborn digital

electronic

application/pdf

born digital

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.

Vincenzo Galasso and Paola Profeta.

CRR WP2004-7

CRR WP

2004-7

http://crr.bc.edu/images/stories/Working_Papers/wp_2004-07.pdf

MChBEnglisheng

MChB

Englisheng

English

eng