A Positive Theory of Social Security

Xavier X. Sala-i-Martin

Journal of Economic Growth Vol 1, #2, June 1996, 277-304


In this paper I develop a positive theory of intergenerational transfers. I argue that transfers are a way to induce retirement, that is, to buy the elderly out of the labor force. The reason why societies choose to do such a thing is that aggregate output is higher if the elderly do not work. I model this idea through externalities in the average stock of human capital: because skills depreciate with age, one implication of these externalities is that the elderly have a negative effect on the productivity of the young. When the difference between the skill level of the young and old is large enough, aggregate output in an economy where the elderly do not work is higher. Retirement in this case will be a good thing to have; pensions are just the means by which such retirement is induced.


Economics of the Elderly, J140. Retirement; Retirement Policies, J260. Social Security and Public Pensions, H550. Economics of Aging, 9180. Employment Studies; Unemployment and Vacancies; Retirements and Quits, 8243. Social Security, 9150. National Government Expenditures, 3221.

This paper also circulated as

Transfers, NBER working paper # 4186, October 1992

Universitat Pompeu Fabra working paper # 108, February 1995