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\begin{document}
\title{Privatizing Social Security: A Political-Economy Approach\thanks{
\ Some of the work on this paper was done while the authors were visiting
the Economic Policy Research Unit (EPRU) at the University of Copenhagen,
February, 2003. We also acknowledge the sponsoring RTN \ project,
\textquotedblleft The Analysis of International Capital Markets:
Understanding Europe's Role in the Global Economy." \ We benefitted from
discussions in a seminar presentation at the Hebrew University; \ in
particular, we wish to thank Elchanan Ben-Porath, Sergiui Hart, Oded Galor,
Motty Perry, and Eytan Sheshinski.}}
\author{Assaf Razin\thanks{%
Mario Henrique Simonsen Professor of Public Economics, Tel-Aviv University
and Friedman Professor of International Economics, Cornell University. \
E-mail address: razin@post.tau.ac.il.} and Efraim Sadka\thanks{%
Henry Kaufman Professor of International Capital Markets, Tel-Aviv
University. \ E-mail address: sadka@post.tau.ac.il.}}
\date{March, 2004}
\maketitle
\begin{abstract}
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The aging of the population shakes the public finance of pay-as-you-go
social security systems. \ We develop a political-economy framework in which
this demographic change leads to the downsizing of the social security
system, and, as a consequence, to the emergence of supplemental individual
retirement programs. Allowing for a one-shot budget deficit, earmarked to
accommodate the cost of the social security reforms, is shown to facilitate
the political-economy transition from a national to a private pension system.
\end{abstract}
\pagebreak
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\section{Introduction}
The economic viability of national old-age security systems has been
increasingly deteriorating in the wake of aging of the population. \ Indeed,
aging raises the burden of financing the existing pay-as-you-go (PAYG),
national pension (old-age security) systems, because there is a relatively
falling number of workers, that have to bear the cost of paying pensions, to
a relatively rising number of retirees. \ Against this backdrop, there arose
proposals to privatize social security, as a solution to the economic
sustainability of the existing systems. \ This, by and large, means a shift
from the current PAYG systems to individual retirement accounts (or
fully-funded systems). \
The increased fragility of national PAYG pension, caused by the aging of the
population, raises doubts among the young about whether the next generations
will continue to honor the implicit intergenerational social contract, or
the political norm, according to which, \textquotedblleft I pay now for the
pension benefits of the old, and the next young generation pays for my
pension benefits, when I get old\textquotedblright . These doubts are, after
all, not unfounded, for there will indeed be more pensioners per each young
worker of the next generation, and hence each one of the young workers will
have to pay more in order to honor the implicit social contract. \ With such
doubts, the political power balance may indeed shift towards scaling down
the PAYG system, encouraging the establishment of supplemental individual
retirement accounts. Such accounts are, by their very nature, fully funded,
so that they are not directly affected by the aging of the population.
\footnote{%
Naturally , the aging of the population has some bearing on individual
retirement accounts too through the general-equilibrium effects on the
return to capital (stemming from the induced change in the capital-labor
ratio).} Naturally, the existing old generation opposes any scaling down of
the PAYG system, because it stands to lose pension benefits (without
enjoying the reduction in the social security contributions). This
opposition can, however, be softened, or altogether removed, if the
government creates a one-shot budget deficit in order to support the social
security system and allow it not to scale down the pension benefits to the
current old, so as to fully offset the reduction in social security
contributions, or even allow it to maintain these benefits intact. (Of
course, this deficit will be carried over to the future, with its debt
service smoothed over the next several generations.)
In this paper we develop an analytical model in which a PAYG, old-age
security system is designed as a political-economy equilibrium. \ We then
investigate how the aging of the population can shift the equilibrium
towards scaling down this fiscal system (thereby encouraging the emergence
of individual retirement accounts). \ We further examine how a one-shot
budget deficit, earmarked for a partial privatization of social security,
can politically facilitate a scaling down of PAYG systems.\footnote{%
In his 2001 testimony to the US Congress, Alan Greenspan argued on the basis
of budget projections (which turned out to be drastically off the mark) that
the federal government would pay off all its debt in a few years, If this
happened, the government would be forced to invest future surpluses in the
financial markets, which may adversely affect corporate govenance. To avoid
this bad outcome, Greenspan favored tax cuts that would reduce the
surpluses. However, a partial pravitization of of the US Social Security,
that would have imposed "transition costs", where the federal government
fulfills its obligations to those who have already paid the social security
tax and, at the same time allows individuals to contribute to their pension
accounts, could have taken care of the budget surpluses, without any
implications for corporate governance. Following Greenspan's testimony, the
resistance in the Congress to Bush's tax cut package collapsed; and the US
government headed for a persistent budget deficits, where a large part of
them are a direct result of the tax cuts.}
The organization of the paper is as follows. Section 2 develops a
political-economy framework for determining the social security system.
Section 3 considers the effect of aging on the social-security system.
\section{Political-Economy Model Of Social Security}
Consider a standard overlapping-generations model in which each generation
lives for two periods: a working period and a retirement period. \ There are
two types of workers: skilled workers who have high productivity and provide
one efficiency unit of labor per unit of labor time, and unskilled workers
who provide only $q<1$ efficiency units of labor per unit of labor time. \
Workers have one unit of labor time during their first period of life, but
are born without skills and thus with low productivity. \ Each worker
chooses whether to acquire an education and become a skilled worker, or else
remain unskilled. \ After the working period, individuals retire, with their
consumption funded by private savings and social security pension, discussed
below.
There is a continuum of individuals, characterized by an innate ability
parameter, $e,$ which is the time needed to acquire skill. \ By investing $e$
units of labor time in education, a worker becomes skilled, after which the
remaining $(1-e)$ units of labor time provide an equal amount of effective
labor in the balance of the first period. \ There are also pecuniary costs
of acquiring skills, $\gamma $, which are not tax deductible.\footnote{%
This is a realistic assumption. Unlike corporations for which depreciation
of capital is deductible, for individuals the pecuniary cost of investment
in human capital is not.} \ The cumulative distribution function of innate
ability is denoted by $G(.)$ with the support being the interval $[0,1]$. \
The density function is denoted by $g=G^{\prime }$.
If an individual with an innate ability level (henceforth an e-individual)
acquires skill, then her income is $(1-\tau )w(1-e)-\gamma $, whereas if she
remains unskilled her income is $(1-\tau )qw$, where $w$ is the wage rate
per efficiency unit of labor and $\tau $ is the social security contribution
(tax) rate. \ There exists a cutoff level, $e$ of the eduation-cost
parameter $e^{\ast },$ such that those with education-cost parameter below $%
e^{\ast }$ will invest in education and become skilled, whereas everyone
else remains unskilled. \ The cutoff level is determined by an equality
between the return to education and the cost of education (including
foregone income):
\begin{equation}
e^{\ast }=1-q-\gamma /[(1-\tau )w].
\end{equation}
We assume a linear production function in which output, Y, is produced using
labor, L, and capital, K:
\begin{equation}
Y={w}L+(1+r)K.
\end{equation}%
The wage rate, $w$ and the gross (before depreciation) rental price of
capital, $1+r$, are determined by the marginal productivity conditions for
factor prices:
\begin{equation*}
w=\partial Y/\partial L\,\,and\,\,{1+r}=\partial Y/\partial K.
\end{equation*}%
These conditions are already substituted into the production function. \ For
simplicity, we assume that capital fully depreciates at the end of the
production process. \
We assume that the population grows at a rate of $n$. \ Labor supply of each
individual is assumed to be fixed, so that the social security tax does not
distort the individual labor-supply decisions, at the margin. \ The
aggregate labor supply does, however, depend on the income tax rate, as this
affects the cut-off ability, $e^{\ast }$, and thus the mix of skilled and
unskilled individuals in the economy. \ This distortion keeps the tax rate
from being driven up to 100\%. At the current period the aggregate labor
supply is given by:
\begin{eqnarray}
L &=&\left\{ \int_{0}^{e^{\ast }}(1-e)dG+q[1-G(e^{\ast })]\right\} N_{o}(1+n)
\notag \\
&=&\ell (e^{\ast })N_{0}(1+n),
\end{eqnarray}%
where $N_{o}(1+n)$ is the size of the working-age population at present ($%
N_{o}$ is the number of young individuals born in the preceding period), and
$\ell (e^{\ast })=\int_{0}^{e^{\ast }}(1-e)dG+q[1-G(e^{\ast })]$ is the
average labor supply (per worker) in the current period.
There is initially a PAYG, old-age social security system by which the taxes
collected from the young (working) population are earmarked to finance a
pension-benefit to the old (retired) population.\footnote{%
This specification put explicitly the benefit, $b,$ as an old-age social
security benefit. In contrast, in an earlier work [e.g. Razin, Sadka and
Swagel (2002a, 2002b)], the benefit $b$ was uniformly paid in cash or in
kind to all young and old alike. It was intended to capture
intragenerational redistributive features of a welfare state reached by some
social consensus.} \ Thus, the benefit $(b_{t}$), paid to each old
individual at present, must satisfy the following PAYG budget constraint:
\begin{equation}
b=\tau wl(e^{\ast })(1+n),
\end{equation}
\noindent where $\tau $ is the social security tax at present. \
Votes are repeated every period. In each period, the benefit of the
social-security system accrues only to the old, whereas the burden (the
social-security taxes) are borne by the young. \ Then, one may wonder why
would not the young, who outnumber the old with a growing population, drive
the tax and the benefit down to zero in a political-economy equilibrium. \
We appeal to a sort of an implicit intergenerational social contract which
goes like this: \textquotedblleft I, the young, pay now for the pension
benefits of the old; and you, the young of the next generation, will pay for
my pension benefit, when I grow old and retire\textquotedblright . \ This
implicit intergenerational contract could be an outcome of an
intergenerational game, with trigger strategies, as shown in Cooley and
Soares (1999a and 1999b) and Bohn (1999).\footnote{%
Cooley and Soarez (1999a, 1999b) and Bohn (1999) have used an explicit
game-theoretic reasoning to address the issue of the survivability of the
PAYG social security system. This literature demonstrates the existence of
an equilibrium in an overlapping-generations model with social security as a
sequential equilibrium in an infinitely repeated voting game. The critical
support mechanism is provided by trigger strategies. As put by Bohn:
\par
\begin{quotation}
\textquotedblleft The failure of any cohort to adhere to the proposed
equilibrium triggers a negative change in voters' expectations about future
benefits that destroys social security. Since survival and collapse are
discrete alternatives, trigger strategy models provide a natural definition
of what is meant by social security being viable."
\end{quotation}
\par
\noindent To support social security as a sequential equilibrium, there is a
very simple condition that must be fulfilled. For the median voter, the
present value of future benefits exceeds the value of social security
contributions until retirement. This condition is easily satisfied in our
overlapping generations model.} The young believe that if they do not pay
the old a pension benefit, then the next young generation will punish them
by not providing for their pensions. \ With such a contract in place, the
young at present are willing to politically support a social security tax, $%
\tau $, which is earmarked to pay the current old a pension benefit of $b$,
because they expect the young generation in the next period to honor the
implicit social contract and pay them a benefit $\alpha b$. The parameter $%
\alpha $ is assumed to depend negatively on the share of the old in the
population. If the current young will each continue to bring $n$ children,
then the share of the old will not change in the next period and $\alpha $
is expected to be one. But if fertility falls and the share of the old in
the next period rises relative to the present, then $\alpha $ is expected to
fall below one. \ This is because the young believe that if fertility falls
in the future, the next young generation will either find it harder or will
be plainly reluctant to continue to support the old (the current) young at
the current level.
Because factor prices are constant over time, current saving decisions will
not affect the rate of return on capital that the current young will earn on
their savings. Hence, the dynamics in this model are redundant. \ For any
social security tax rate, $\tau $, equations (1) and (4) determine the
functions $e^{\ast }=e^{\ast }(\tau )$ and $b=b(\tau )$. \ Denote by $%
W(e,\tau ,\alpha )$ the lifetime income of a young e-individual:
\begin{equation}
W(e,\tau ,\alpha )=\left\{
\begin{array}{c}
(1-\tau )w(1-e)-\gamma +\alpha b(\tau )/(1+r)\quad \,\,for\,\,\,e\leq
e^{\ast }(\tau ) \\
(1-\tau )wq+\alpha b(\tau )/(1+r)\,\quad \,for\,\,e\geq e^{\ast }(\tau ).%
\end{array}%
\right.
\end{equation}%
\qquad
\qquad \qquad In each period, the political-economy equilibrium for the
social security tax, $\tau $ (and the associated pension benefit, $b$), is
determined by majority voting among the young and old individuals who are
alive in this period. \ The objective of the old is quite clear: so long as
raising the social security tax rate, $\tau ,$ generates more revenues, and
consequently, a higher pension benefit, $b,$ they will vote for it. \
However, voting of the young is less clear-cut. \ Because a young individual
pays a tax bill of $\tau w(1-e)$ or $\tau wq$, depending on her skill level,
and receives a benefit of $\alpha b/(1+r)$, in present value terms, she must
weigh her tax bill against her benefit. \ She votes for raising the tax
rate, if $\partial W/\partial \tau >0$, and for lowering it, if $\partial
W/\partial \tau <0$. \ Note that:
\begin{equation}
\partial ^{2}W(e,\tau ,\alpha )/\partial e\partial \tau =\left\{
\begin{array}{c}
w\,for\text{ }ee^{\ast }(\tau ).%
\end{array}%
\right.
\end{equation}%
Therefore, if $\partial W/\partial \tau >0$ for some $e_{o}$, then $\partial
W/\partial \tau >0$ for all $e>e_{o}$; and, similarly, if $\partial
W/\partial \tau <0$ for some $e_{o}$, then $\partial W/\partial \tau <0$ for
all e\TEXTsymbol{<}$e_{0}$. \ This implies that if an increase in the social
security tax rate benefits a particular young (working) individual (because
the increased pension benefit outweighs the increase in the tax bill), then
all young individuals who are less able than her (that is, those who have a
higher cost-of-education parameter, $e$), must also gain from this tax
increase. \ Similarly, if a social security tax increase hurts a certain
young individual (because the increased pension benefit does not fully
compensate for the tax hike), then it must also hurt all young individuals
who are more able than her.
As was already pointed out, the old always opt for a higher social security
tax. \ But as long as $n>0$, the old are outnumbered by the young. \ To
reach an equilibrium, the bottom end of the skill distribution of the young
population joins forces with the old to form a pro-tax coalition of $50\%$
of the population,whereas the top end of the skill distribution of the young
population forms a counter, anti-tax coalition of equal size. \ In
determining the outcome of majority voting the decisive voter must be a
young individual, with an education-cost index denoted by $e_{M}$, such that
the young who have an education-cost index below $e_{M}$ (namely, the
anti-tax coalition) form $50\%$ of the total population. \ The
political-economy equilibrium tax rate maximizes the lifetime income of this
median voter.
Formally, $e_{M}$ is defined as follows. \ There are $N_{o}(1+n)G(e_{M})$
young individuals with cost-of-education parameter $e\leq e_{M}$ (more able
than the median voter), and $N_{o}(1+n)[1-G(e_{M})]$ young individuals with
cost-of-education parameter $e\geq e_{M}$ (less able than the median voter).
\ There are also $N_{o}$ retired individuals at present who always join the
pro-tax coalition. Hence, $e_{M}$ is defined implicitly by:
\begin{equation*}
N_{0}(1+n)G(e_{M})=N_{o}(1+n)[1-G(e_{m})]+N_{o}
\end{equation*}%
Dividing this equation by $N_{o}$ and rearranging terms yield the
cost-of-education parameter for the median voter:
\begin{equation}
e_{M}=G^{-1}\left[ \frac{2+n}{2(1+n)}\right] .
\end{equation}
\qquad As noted, the political equilibrium tax rate, $\tau ,$ denoted by $%
\tau _{o}(e_{M},\alpha )$, maximizes the lifetime income of the median voter:
\begin{equation}
\tau _{o}(e_{M},\alpha )=\arg \max_{\tau }W(e_{M},\tau ,\alpha ).
\end{equation}%
This equilibrium tax rate is implicitly defined by the first-order condition:
\begin{equation}
\frac{\partial W[e_{M},\tau _{0}(e_{M},\alpha ),\alpha ]}{\partial \tau }%
\equiv B[e_{M},\tau _{0}(e_{M},\alpha ),\alpha ]=0,
\end{equation}%
and the second-order condition is:
\begin{equation}
\frac{\partial ^{2}W[e_{M},\tau _{0}(e_{M},\alpha ),\alpha ]}{\partial \tau
^{2}}=B_{\tau }[e_{M},\tau _{o}(e_{M},\alpha ),\alpha ]\leq 0,
\end{equation}%
where $B_{\tau }$ is the partial derivative of $B$ with respect to its
second argument.
\section{Social Security under Strain: Aging Population}
We now examine how aging affects the political-economy equilibrium of social
security. We first continue to maintain in sub-section 3.1 the strict PAYG,
feature of social security assumed so far. In sub-section 3.2 we relax this
feature. \
\subsection{Strict Balanced-Budget Rules}
In a PAYG system, the burden of financing the pension benefits to the old
falls on fewer young shoulders, when population ages. If the fertility of
the current young falls below the fertility rate $(n)$ of their parents,
then the share of the old in the next period will rise. The current young
expects the next young generation to reduce the benefit it pays to the old
(current young) generation. That is, the current young generation perceives
a smaller $\alpha .$
In order to find the effect of aging on social security, we investigate the
effect of a decline in $\alpha $ on the equilibrium social security tax
rate, $\tau _{o}(e_{M},\alpha ).$ Differentiate equation (9) totally with
respect to $\alpha $ to conclude that
\begin{equation}
\frac{\partial \tau _{o}(e_{M},\alpha )}{\partial \alpha }=-\frac{B_{\alpha
}[e_{M},\tau _{0}(e_{M},\alpha ),\alpha ]}{B_{\tau }[e_{M},\tau
_{0}(e_{M},\alpha ),\alpha ]},
\end{equation}%
where $B_{\alpha }$ is the partial derivative of $B$ with respect to its
third argument. \ Because -$B_{\tau }$ is nonnegative [see the second-order
condition (10)], it follows that the sign \ of $\partial \tau _{o}/\partial
\alpha $ is the same as the sign of $B_{\alpha }.$ \ It also follows from
equation (9) that $B_{\alpha }={\partial ^{2}}W/{\partial \alpha \partial }{%
\tau }$. \ Employing equation (5) we find that:
\begin{equation}
B_{\alpha }[e_{M},\tau _{o}(e_{M},\alpha ),\alpha ]=\frac{\partial
^{2}W[e_{M},\tau _{o}(e_{M},\alpha ),\alpha ]}{\partial \alpha \partial \tau
}=\frac{1}{1+r}\frac{db[\tau _{0}(e_{M},\alpha )]}{d\tau }.
\end{equation}
Naturally, no one will vote for raising the social security tax if $db/dt<0$%
, because in such a case, the pension-benefit falls when the social security
tax is raised. \ Put differently, a political-economy equilibrium will never
be located on the \textquotedblleft wrong\textquotedblright\ side of the
Laffer curve, where a tax rate hike lowers revenue. \ This can also be seen
formally. \ From equation (5),
\begin{equation}
B(e,\tau ,\alpha )=\frac{\partial W(e,\tau ,\alpha )}{\partial \tau }%
=\left\{
\begin{array}{c}
-w(1-e)+\dfrac{\alpha }{1+r}\dfrac{db(\tau )}{d\tau }\ \text{for\ }e\leqq
e^{\ast }(\tau ) \\
-wq+\dfrac{\alpha }{1+r}\dfrac{db(\tau )}{d\tau }\ \text{for\ \ }e\geqq
e^{\ast }(\tau )%
\end{array}%
\right. ,
\end{equation}%
so that, when the lifetime income of the median voter is maximized that is,
when $B=0$ [see equation (9)], we have
\begin{equation}
\frac{db[(\tau _{0}(e_{M},\alpha )]}{d\tau }=\left\{
\begin{array}{c}
w(1-e_{M})(1+r)/\alpha \,\,\,\,\text{if\ }\,e_{M}\leqq e^{\ast }(\tau ) \\
wq(1+r)/\alpha \,\,\,\text{if\ \ }e_{M}\geq e^{\ast }(\tau )%
\end{array}%
\right\} \geq 0.
\end{equation}%
Thus, it follows from equations (12) and (14), that $B_{\alpha }[e_{M},\tau
_{o}(e_{M},\alpha ),\alpha ]\geq 0$, and hence, from equation (11), that
\begin{equation}
\frac{\partial \tau _{o}(e_{M},\alpha )}{\partial \alpha }>0.
\end{equation}
We conclude that when the young population expects reduced social security
benefits because of the aging of the populations (that is, when $\alpha $
falls), the public indeed votes for scaling down the social security system
already at present (that is, for lowering $\tau $ and $b$). \ As a result,
the young resort to supplemental old-age savings, such as individual
retirement accounts. \ Naturally, the old are worse-off as a result of
reducing $b$. \ But, they are outvoted by the young, whose attitude for
lowering $\tau $ has turned stronger, following the reduction in the social
security benefits that they will get.
\subsection{Reform-Earmarked Budget Deficit}
The old, naturally, continue to oppose the (partial) transition from a PAYG,
old age social security system to individual retirement accounts, because
they lose some of their pension benefits. \ They also have a strong moral
claim that they contributed their fair share to the social security system,
when they were young, but they receive at retirement less than what they
paid when they were young. Their opposition, strengthened perhaps by being
morally justified, can be accommodated, in part or in full, if the
government is allowed to make a \textbf{one-shot, debt-financed} transfer to
the social security system, so as to allow the system to pay pension
benefits in excess of the social security tax revenues. \ This deficit is
carried forward to the future, and its debt-service is smoothed over the
next few generations, so that its future tax implications for the current
young generation is not significant. Such a reform-earmarked budget deficit
may indeed be considered in the expected revision of the Stability and
Growth Pact in the EU. \
For simplicity, suppose that the government makes a transfer at the exact
amount that is required to keep the pension benefits of the current old
intact, despite the reduction in the social security tax rate. Specifically,
when $\tau $ falls, then the term $b$ in equation (4), that is financed by
this $\tau ,$ falls as well. But we assume that the government compensates
the old generation, so as to maintain the total pension benefits intact.
Therefore, despite the fall in $b,$ the old are indifferent to the reduction
in $\tau $ (and, consequently, the reduction in b). Thus, the outcome of the
majority voting is now effectively determined by the young only. The median
voter is now a median among the young population only. This median voter has
a lower cost-of-education index than before; that is, $e_{M}$ will fall.
In order to find the effect of the fall in $e_{M}$ on the political-economy
equilibrium social security tax rate, $\tau _{0}$(e$_{M},\alpha ),$ we
follow the same procedure as in the preceding section, and conclude that:
\begin{equation}
\frac{\partial \tau _{0}}{\partial e_{M}}=-\dfrac{B_{e_{M}}[e_{M},\tau
_{o}(e_{M},\alpha ),\alpha ]}{B_{\tau }[e_{M},\tau _{o}(e_{M},\alpha
),\alpha ]},
\end{equation}%
where, as before, the sign of $\partial \tau /\partial e_{M}$ is the same as
the sign of \ $B_{e_{M}}$, because $B_{\tau }\leq 0.$ \ Note that $B_{e_{M}}=%
{\partial ^{2}}W/\partial e_{M}{\partial \tau }$, [see equation (9)], so
that it follows from equation (5) that:
\begin{equation}
B_{e_{M}}[e_{M},\tau _{0}(e_{M},\alpha ),\alpha ]=\left\{
\begin{array}{c}
w\,\,for\,\,e_{M}e^{\ast }(\tau )%
\end{array}%
\right. .
\end{equation}%
Thus, we conclude that $\partial \tau /\partial e_{M}$ is nonnegative: it is
positive when the median voter is a skilled individual (that is, when $%
e_{M}e^{\ast }$). \ Hence, a decline in $e_{M}$ decreases
(or leaves intact) the social security tax $\tau _{o}(e_{M},\alpha )$ and
the associated benefit $b.$ .
The rationale for this result is straightforward. \ All unskilled people
have the same lifetime income, regardless of their cost-of-education
parameter, $e$. \ Therefore, the attitude towards the ($\tau ,b)-$ pair is
the same for all of them. \ Hence, the change in the median voter has no
consequence on the outcome of the majority voting, when this median voter is
an unskilled individual. \ For skilled individuals, lifetime income
increases when the education-cost parameter, $e$, declines. \ Because the
social security system is progressive with respect to the cost-of-education
parameter, the net benefit from it (that is, the present value of the
expected pension benefit minus the social security tax) declines, as
lifetime income increases (that is, as $e$ falls). \ Therefore, a decline in
the cost-of-education parameter of the median voter, $e_{M}$, lowers the
political-economy equilibrium social security tax and pension benefit
\section{Conclusion}
Making the fiscal constraints, of the sorts previously imposed by the
Stability and Growth Pact in the European Union, more flexible, may
facilitate the political-economy transition from a national PAYG, old-age
social security system to a fully funded private pension system. \ Such a
transition, will, of course, improve the viability of the national system
during and after the transition. But this comes at a cost of a lesser degree
of income redistribution, an inherent feature of a national system.
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\end{document}