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) 2 T, 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-  )