Private Versus Public Old-Age Security

Abstract

We compare two institutions head on, a family compact -a parent makes a transfer to her parent in anticipation of a possible future gift from her children -with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist; indeed, the former may be preferred. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system -as the experience of Europe, circa 1880s, would suggest -this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system.

Evolution of individual preferences and persistence of family rules

“…Taxing the young in proportion to their earnings, and subsidizing the old at a flat rate, as in a Beveridge-style public pension system, would thus reduce the share of the young who give attention to their elderly parents. Barnett et al (2018) demonstrate that, given the existence of a selfenforcing family rule ensuring that the young give money to their elderly parents as in Cigno (1993), a public pension system can be justified only on redistributive grounds in the presence of heterogeneous agents. The same argument applies with even greater force to public policy towards the old in general if, as in the present paper, family rules ensure the delivery of a good like filial attention that, unlike money, cannot be procured in any other way.…”

Pareto-improving transition to fully funded pensions under myopia

“…Then, in a 9 More broadly, social security serves multiple functions: it is a pension (or old-age support) program, it provides insurance (e.g., dependent survivor benefits), and it also brings about income redistribution-see Barr and Diamond (2006) and Krueger and Kubler (2006). As Barnett et al (2018) argue, "[…] while a social security system may touch on all three roles, its principal identity is (and has always been) intergenerational, its chief function, pension provision to the elderly. To reiterate, in its identity and function as the chief intermediator of intergenerational transfers, social security is unique.…”

“…As Barnett et al . (2018) argue, “[…] while a social security system may touch on all three roles, its principal identity is (and has always been) intergenerational, its chief function, pension provision to the elderly. To reiterate, in its identity and function as the chief intermediator of intergenerational transfers, social security is unique.”…”

Reference‐dependent preferences, time inconsistency, and pay‐as‐you‐go pensions

“…1 1 As Barnett et al (2018) put it “[…] its principal identity is (and has always been) intergenerational, its chief function, pension provision to the elderly. To reiterate, in its identity and function as the chief intermediator of intergenerational transfers, social security is unique.…”