Economic Growth and Social Security

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Exogenous fertility has usually been assumed in models of explaining the existence and effects of pay-as-you-go social security system. We assume that endogenous fertility is allowed in a two overlapping generations simple model with the young caring for the old. The social security level is modeled as a solution of an optimal allocation problem by the government. Social security benefit is assumed to be conditional on individual fertility.We have shown that, although the optimal allocation cannot be achieved in practice, individuals follow the social security level set by the government and reach a sustainable sub-optimal steady state. Furthermore, we have also shown that the sustainable steady state has higher utility than that of the steady state without a social security system.What is the future of pay-as-you-go public pensions in the face of declining population growth? One common view is pessimistic, in that the future young may choose to shed the burden of a larger and larger number of elderly. However in simple model, which incorporates interactions between endogenous population growth and economic variables,public pensions are themselves a contributing factor to the decline in population growth. In the model, such pensions are sustainable and improve steady state welfare.These results also provide importanr messages to many developing countries where transfers to the old still occur within families as the major old-age support and over-population is a common problem. Our results imply that moving towards a social security system would be welfare-improving, and would lead to declining fertility. Thus the over-population problem can be solved even with improved welfare on an individual level.