A quantitative theory of social security without commitment

Abstract

This paper investigates the determination of social securitywithin a general equilibrium, overlapping-generations modelwhere agents live for many periods, and replacement rates are determined through voting in each period by forward looking agents. The distinctive feature is the study of Markov equilibrium policy outcomes which do not rest on a commitment mechanism. Versions of the model are calibrated to the US economic, policy, and demographic conditions. Even in the absence of commitment, the policy preferences of taxpaying working-age voters sustain a positive level of retirement benefits. This follows because the current choices about social security
will have, at the time when the current voters will retire, a positive impact on the political support for social security and on the returns to savings.On the other hand, the projected decline in the U.S. population growth rate causes the replacement rate and the tax rate to decline. This quantitative response without commitment differs from that in the case when policies are committed at time zero.

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