DP3621 The Stability and Growth Pact as an Impediment to Privatizing Social Security

Author(s): Assaf Razin, Efraim Sadka
Publication Date: November 2002
Keyword(s): ageing, budget deficit, individual retirement accounts, median voter, pay-as-you-go social security
JEL(s): H00
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3621

The ageing of the population shakes the confidence in the economic viability of pay-as-you-go social security systems. We demonstrate how in a political-economy framework the shaken confidence leads to the downsizing of the social security-system, and to the emergence of supplemental individual retirement programs. Lifting the Stability Pact-type ceiling on fiscal deficits is shown to facilitate the transition from a national to a private pension system, through an endogenously determined shift in the median voter.