Transcript Document

Public Sector Economics
Social Security, Voting, and Chain Letters
Voting Version
• elderly are not a majority, or even a majority of a
majority
– US aged 65+ are 13% of population
– approaching 20% in Europe
• coalition with the poor?
• Browning: coalition with the middle-aged
– equal numbers of young, middle-aged, and old
– election between doing nothing or taxing T forever to finance
paygo SS for the old
– with r = 0, old gain 2T, middle-aged gain T, young gain
nothing
– with r > 0 (but not too large), old and middle-aged gain and
young lose
Voting Version (cont’d)
• subgame perfection
– young and middle-aged both favor temporary
suspension
– Kotlikoff et al use Folk Theorem
Efficiency Version
• just young and old
• taxes are proportional to aggregate labor
income, which grows at rate g > 0
• budget time series is T, (1+g)T, (1+g)2T, etc.
• initial old gain T
• initial young lose T - (1+g)T/ (1+r) = (r-g)T/
(1+r)
• later young lose the same, except scaled by
growth factor
• this “loss” is a gain if r < g
Efficiency Version (cont’d)
• although r may appear less than g, the economy
is in fact “dynamically efficient” because the
business sector creates more resources than it
uses
• even if r < g, this analysis ignores dwcs of taxes
and spending
• more general condition is
g > [++(1+)r]/(1-)