Social Security: What is it good for?

I develop three life cycle models that are designed to examine under what circumstances social security can improve the welfare of societies in the Pareto sense: can at least one person be made better off, without harming young and all old people are assumed to be identical. Rather, the focus is on intergenerational redistribution, which can occur three ways: (1) via private intergenerational transfers, (2) via private saving, and (3) via social security. Externalities play a prominent role in two of the models. In chapter 1, young people make private transfers to their parents, but the quantity of the total transfer from children to parents is not optimal because of an externality. Social security plays a Pigovian role in that model, setting up an incentive system designed to cause private behavior to yield the optimum result. In chapter 3, pay-as-you-go social security is revealed to be a system of intergenerational externalities. Because of this, there is avoidance of social security taxes by the young. This phenomenon of social security tax avoidance leads to a stricter welfare test for pay-as- you-go social security than the traditional Samuelsonian test. There are no externalities in chapter 2, since social security is treated there as an investment plan for workers: workers thus internalize all of the utility impacts of social security tax payments, just as they internalize the utility impacts of their private saving decisions. The welfare impact of social security in that model is a pure "moneysworth," or rate of return effect. The simplicity of the welfare criterion developed in the model of chapter 2 makes it possible to develop an empirical test of the welfare properties of the United States' Social Security system, using data from the Health and Retirement Study.

Sociology, Public and Social Welfare (0630)

5028

ISBN 0-493-33161-1