Social Security in Theory and Practice (II): Efficiency Theories

Abstract

166 countries have some kind of public old age pension.What economic forces create and sustain old age Security as a public program? Mulligan and Sala-i-Martin (1999b) document several of the internationally and historically common features of social security programs, and explore theories of Security. This paper discusses the theories, which view creation of the program as a full of partial solution to some market failure. Efficiency explanations of social security include the SS as welfare for the elderly the increases productivity to optimally manage human capital externalities, optimal retirement insurance, the prodigal father problem, the misguided Keynesian, the optimal longevity insurance, the government economizing transaction costs, and the return on human capital investment. We also analyze four narrative theories of social security: the chain letter theory, the lump of labor theory, the monopoly capitalism theory, and the Sub-but-Nearly-Optimal policy response to private pensions theory. The political and efficiency explanations are compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan. Most of the explanations suggest that forced savings does not increase welfare, and may decrease it. See also the first part of the paper by Casey B. Mulligan and Xavier Sala-i-Martin Social Security in Theory and Practice (I): Facts and Political Theories