Discussion Paper Series 2004-E-16

Privatizing Social Security: A Political-Economy Approach

Assaf Razin, Efraim Sadka

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.

Keywords: Dependency ratio, Median voter, Privatization, Individual saving accounts

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2004 Bank of Japan All Rights Reserved.

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