Aggregate and distributional effects of fair social security

Abstract

In an overlapping generations economy with production, endogenous labor supply, a bequest motive, and uncertain lifetime, we show that a fair, fully-funded social security program reduces the aggregate levels of output, employment, capital, and savings. We determine the necessary and sufficient conditions for this social security program to increase the inequality of the income distribution. The conclusions apply to the entire non-stationary, competitive, equilibrium path taken by the economy following the introduction of social security.

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