Working Paper: NBER ID: w11121
Authors: Isaac Ehrlich; Jinyoung Kim
Abstract: The worldwide problem with pay-as-you-go (PAYG) social security systems isn't just financial. This study indicates that these systems may have exerted adverse effects on key demographic factors, private savings, and long-term growth rates. Through a comprehensive endogenous-growth model where human capital is the engine of growth, family choices affect human capital formation, and family formation itself is a choice variable, we show that social security taxes and benefits can create adverse incentive effects on family formation and subsequent household choices, and that these effects cannot be fully neutralized by counteracting intergenerational transfers within families. We implement the model using calibrated simulations as well as panel data from 57 countries over 32 years (1960-92). We find that PAYG tax measures account for a sizeable part of the downward trends in family formation and fertility worldwide, and for a slowdown in the rates of savings and economic growth, especially in OECD countries.
Keywords: Social Security; Demographic Trends; Economic Growth; Family Formation; Private Savings
JEL Codes: H0; J1; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ratio of social security pension benefits to GDP (pen) (H55) | marriage rate (J12) |
| ratio of social security pension benefits to GDP (pen) (H55) | total fertility rates (TFR) (J11) |
| ratio of social security pension benefits to GDP (pen) (H55) | private savings rates (D14) |
| ratio of social security pension benefits to GDP (pen) (H55) | GDP growth (O49) |