Abstract: This paper investigates the determination of social security within a general equilibrium, overlapping-generations model where agents live for many periods, and replacement rates are determined sequentially through bargaining between age groups of forward looking agents. The distinctive feature is the study of Markov equilibrium policy outcomes which do not rest on any commitment mechanism. For the purpose of comparison with the approach typical of the literature, the case of commitment to policies at time zero is also studied. Versions of the model are calibrated to the US post-war economic, policy, and demographic conditions. Even in the absence of commitment, the policy preferences of tax-paying working-age voters can sustain a positive level of retirement benefits. This follows because current social security has a positive impact on future pension benefits and returns to savings at the time when the current voters will retire. On the other hand, the projected decline in the US population growth rate causes the replacement rate and the GDP share of transfers to decline, but the response under sequential non-commitment policies is less dramatic than when policies are committed at time zero.

Journal of Public Economics, 62, 652-671, 2008 download