A Positive Theory of Social Security Based on Reputation

Why are more redistributive social security systems smaller? A median voter approach

“…Therein, old-age security involves an earnings-related and a flat-rate pillar (θ ∈ (0, 1)) when households work for one period (Casamatta et al, 2000 and Conde-Ruiz and Profeta, 2007) or the pension system comprises only a flat-rate scheme when households work multiple periods (Cooley and Soares, 1999). Both specifications thereby circumvent the analytical complexity involved with earnings-related systems and multiple working periods.…”

“…The latter difference entails that even high-productivity individuals tend to support social security towards the end of their working life. When close to retirement, they view past contributions as sunk and prefer a continuation of social security (Cooley andSoares, 1999 andBoldrin andRustichini, 2000). Furthermore, accounting for en-dogenous labor supply may qualitatively change conclusions from models that would be reached assuming exogenous labor supply.…”

Political Preferences and the Aging of Populations

“…The former approach has been first formalized by Sjoblom (1985), more recent modeling in this vein has been done by Bellettini and Ceroni (1999); Boldrin and Rustichini (2000) and Azariadis and Galasso (2002). On the other hand, reputation as a mechanism to uphold the social contract has been modeled by Cooley and Soares (1999). All these models have in common that they employ an extensive, perfect information game to formalize the social contract.…”

“…This reputation mechanism, which is in a similar vein as in Cooley and Soares (1999) has the unfortunate implication that once a generation deviates, the "nuclear" option goes into force and the payment of pensions is not chosen by subsequent generations, precluding the re-introduction of the system. Therefore, it does not represent a renegotiation proof equilibrium.…”

Gerontocracy revisited: unilateral transfer to the young may benefit the middle-aged

“…The older generation chooses social capital investment to maximize tax revenue from the young net of investment costs. Cooley and Soares (1999) construct a model in which a pay-as-you-go system can be adopted as a voting equilibrium among generations in a closed economy. The middle-aged and old generations consider the contributions they have made as sunk costs.…”