Social security in periods of demographic uncertainty: A theoretical and empirical analysis

Three essays explore the effect of population growth on social security (SS).; The first essay considers the SS program in a public choice framework. The argument demonstrates that the SS program favored by the median voter will be too large from the perspective of young and future voters. The program is strictly pay-as-you-go and dominates other alternatives in successive generations. Demographic uncertainty is introduced into the model. With demographic uncertainty present voters no longer necessarily choose to have a strictly pay-as-you-go SS program. The median voter may find it optimal to allow a trust fund to build in periods of favorable demographic circumstances in anticipation of less favorable future circumstances.; In the second essay a time series analysis examines the relationship between SS financing policy and demographics and demographic expectations. The choice model developed in essay one predicts that voters favor partial reserve fund financing of SS when the SS taxpayer-beneficiary ratio is expected to fall in future periods. The time series analysis examines SS surplus and trust fund movements as demographic expectations have changed. Evidence is presented that SS trust fund movements have been sensitive to expectations about future taxpayer-beneficiary ratios.; The final essay examines the efficacy of SS as a means of income insurance. A model with a SS program is constructed. In this model SS is financed through proportional taxation and pays out benefits in a progressive manner. Thus SS potentially creates a means of income insurance by redistributing wealth from rich to poor. It is demonstrated that the effectiveness of SS in providing income insurance depends heavily on population growth. If population growth rates are "small" SS provides a relatively poor means of income insurance. If population growth rates are "large" SS may provide an efficient method of insuring income. Prevailing U.S. population growth rates and interest rates imply that SS appears to represent an inefficient method of income insurance.