The Political Economy of Social Security and Entitlements

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In the United States, as in many other countries, the economic burden of public entitlement programs has become a serious fiscal issue. Most notable is the Social Security system which has been the focus of much recent attention because of the current demographic makeup of the population. The prospect of the retirement of the baby boom generation and the demands that will place on the next generation of workers has caused many to question the basic idea that the provision of retirement benefits should be based on a pay-as-you-go system and regarded as an `entitlement`. This project will study the system of transfers that are regarded as entitlements. It will treat these as problems in political economy. The approach taken is to ask how a social security system and a publicly funded education system can emerge as both a political and an economic equilibrium in a competitive economy. Very little research has been done that simultaneously analyses the general equilibrium economic consequences and the political economy of social security. Understanding the interaction between political economy of social choices and their general equilibrium effects is important for understanding their welfare implications, for evaluating proposals for transforming social security from a pay-as-you-go system to a fully-funded system, and for evaluating efforts to decrease the public funding of education. A dynamic general equilibrium model will be constructed with multiple generations of agents, that capture the essence of the intertemporal choice problem involved in saving for retirement.