Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/250426 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14765
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We analyze the political stability of funded social security. Using a stylized theoretical framework we study the mechanisms behind governments capturing social security assets in order to lower current taxes. The results and the driving mechanisms carry over to a fully-fledged and carefully calibrated overlapping generations model with an aging population. Funding is efficient in a Kaldor-Hicks sense. We demonstrate that, even though we can rationalize the actual introduction of a two-pillar defined-contribution scheme with funding through a majority vote, a new vote to curtail the funded pillar through asset capture or permanent diversion of contributions to the pay-as-you-go pillar always receives majority support. For those alive and thus allowed to vote, the temporary reduction in taxes outweighs the reduction in retirement benefits. This result is robust to substantial intra-cohort heterogeneity and other extensions, and only overturned with a sufficient degree of altruism. Our analysis rationalizes the experience of Central and Eastern European countries, who rolled back their funded pension pillars soon after setting them up.
Subjects: 
social security
funding
pay-as-you-go
asset capture
majority vote
welfare
JEL: 
H55
D72
E17
E27
Document Type: 
Working Paper

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