Social Security in Theory and Practice, with Implications for Reform, Casey B. Mulligan and Xavier X. Sala-i-Martin

Working Paper Columbia University, December 1998.

Abstract

166 countries have some kind of public old age pension. What economic forces create and sustain Social Security as a public program? We document several of the internationally and historically common features of social security programs, which include both explicit and implicit taxes on labor supply, pay-as-you-go, intergenerational redistribution, and benefits which are not means-tested. Explanations of social security include the "prodigal father problem," optimal disability insurance, welfare for the elderly, optimal longevity insurance, "public sector chain letter," optimal management of human capital externalities, and time-intensive political competition. Each of the explanations is compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan. Most of the explanations suggest that forced savings does not increase welfare, and may decrease it.