Home production and Social Security reform

Abstract

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model di¤erentiates both consumption goods and labor e¤ort according to their respective roles in home production and market activities. Using a calibrated model, we conduct a policy experiment where we eliminate the current pay-as-you-go Social Security System. We …nd that the experiment has important implications for labor supply as well as consumption decisions and that these decisions are in ‡uenced by the presence of a home production technology. Comparing our economy to a one-good economy without home production, the welfare gains of eliminating Social Security are magni…ed signi…cantly especially in the long run. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production. JEL Classi…cations: E21, E62, H55

Families and social security

“…As our reform clearly worsens labor supply conditions, it leads to larger efficiency losses when labor supply is more elastic. Dotsey, Li and Yang (2015) report that the privatization of social security leads to higher long-run welfare levels in a model with home production compared to a model without. Note that this result is not at all in conflict with ours.…”

“…With these effect in mind we can now turn to the welfare consequences of our reform for 10 Examples of this approach areİmrohoroglu et al (1995,1999), Nishiyama andSmetters (2007), Nishiyama (2010), Dotsey, Li and Yang (2015) or Kaygusuz (2015). 11 In the initial equilibrium in reward for the contribution to the pension system, an individual receives pension benefits at old age.…”

“…Olivetti (2006) and Greenwood et al (2005) are popular representatives of this line of research. The paper that is most closely related to ours is probably Dotsey, Li and Yang (2015), who simulate social security reforms in a standard stochastic overlapping generation model (without families) that incorporates home production.…”

Assessing pension system outcomes in Brazil

“…According to Song et al (2012), informality, combined with other labor market imperfections, would also play a central role in explaining the successive deficits faced by the PAYG social security model. Yasar (2013), Dotsey et al (2015), among others, follow this argument. Regarding productivity, Paley's (1998) seminal work is an important contribution to understand how productivity influences both the diagnosis of the real conditions of the social security system (Moreira et al, 2019) and the overcoming of its main challenge, which is the accelerated population aging process (Boulhol, 2019).…”

“…Besides its usual role in providing funds for the elderly, it can serve as an instrument to foster economic activity (through an improvement in the distribution of income that raises effective demand), alleviate poverty for the elderly, and fight interregional inequalities. Presenting a synthesis of the discussion, Ferreira (2007) argues that the existence of social security systems is generally based on three arguments: the first is because governments are benevolent and paternalistic (Dotsey et al, 2015); second, for governments to correct market inefficiencies (Feldstein, 1998); and, third, as a result of coalition pressures among voters, which arise amid broader social demands (Hill, 2006). These different ways of understanding pension systems also influence the way how financial and actuarial difficulties faced by them are interpreted (Rego, Paula, Brito, 2019).…”