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
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