Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from the International Experience

Abstract

We trace the impact of pay-as-you-go (PAYG) social security taxes on demographic and economic trends through an endogenous-growth model where human capital is the engine of growth, family choices affect its formation in children, and family formation itself is a choice variable. We show that family formation and subsequent decisions by married and single households concerning children and savings are generally adversely affected by the PAYG system. We implement the model using panel data from 57 countries over 32 years (1960-1992). We find that PAYG taxes retard savings and economic growth, and account for a sizeable portion of the downward trends in family formation and fertility around the world.