Social Security Reform and Population Ageing in a Two-Sector Growth Model

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Abstract

This paper analyses the effects of reducing unfunded social security and population ageing on economic growth and welfare, both for a small open economy and for a closed economy.The economy consists of a service sector and a commodity sector.Productivity growth only occurs in the latter sector and is assumed to depend positively on its size.It is shown that if old agents mainly demand labour intensive services, a decrease of the pay-as-you-go (PAYG) pension scheme reduces long-run growth and thus welfare in a small open economy, whereas current generations are better off.However, reducing social security raises productivity growth in a closed economy, both in the short and long run. Furthermore, ageing will lead to a lower long-run rate of economic growth in a small open economy, whereas in the short run, the effects depend on the type of ageing and the size of the PAYG-scheme.In a closed economy, the effects of ageing depend on the substitutability of labour and capital.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages46
Volume2002-25
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-25

Keywords

  • economic growth
  • welfare
  • social security
  • pensions
  • privatization
  • ageing
  • population dynamics
  • overlapping generations

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