Lex Meijdam

Social security and endogenous fertility: pensions and child allowances as siamese twins

Abstract This paper analyses public pensions and child support in a model with endogenous fertility. We show that the individual fertility choice may not coincide with the social optimum, due to the existence of external effects of children on society as a whole. The market outcome without government intervention is efficient, however, as the externalities exactly cancel out in that case. If the government wants to redistribute towards the old, it cannot replicate the command optimum by merely applying lump-sum transfers, but rather needs a child allowance scheme to effectively alter the number of offspring. Finally, we analyse whether a Pareto-improving social security reform is possible. It is shown that merely reducing the PAYG-scheme cannot be Pareto-improving, but the introduction of a child allowance scheme can be.

Aging and political decision making on public pensions

In this paper decision making on public pensions in a representative democracy is modeled within the framework of the well-known two-overlappinggenerations (OLG) general-equilibrium model with rational expectations. The model is used to analyze the effects of aging on the economy in general and on the evolution of public pension schemes in particular, where aging is interpreted as a combination of a decrease in the rate of population growth and an increase in the political influence of pensioners. Analytical results are derived for the long run as well as for the short run by the method of comparative statics and comparative dynamics respectively. It appears that an increase in transfers to the old is not guaranteed if due to aging their political power increases.

Ageing, migration and endogenous public pensions

Abstract This paper analyses migration behaviour of mobile workers in reaction to population ageing. We show that the conventional wisdom that a decrease in fertility will lead to a rise in wages, and thus to an inflow of immigrants that mitigates the adverse effects of ageing on public pensions, may not hold if labour is heterogeneous. Moreover, we demonstrate that if public pensions are endogenous, i.e., if ageing leads the elderly to successfully lobby for higher taxes, it may take several generations before a steady-state is reached and the initial migration flow may be opposite to the steady-state migration.

Public investment and intergenerational distribution

Abstract We study the effects of public investment in a dynamic overlapping-generations model of a small open economy. Boosting public investment stimulates private capital formation, output, and wages in the long run. The impact effects depend critically on whether public capital is modelled as a stock or as a flow. The welfare benefits are unevenly distributed across generations because capital ownership rises with age and wages rise only gradually (under the stock interpretation). A suitable egalitarian bond policy ensures that everybody gains to the same extent. A simple modified golden rule for public investment is derived.

The dynamics of government debt

This paper deals with decision making on government debt in an overlapping-generations model of a small open economy. The government is concerned with the utility of current generations only, but it explicitly takes the effect of current decisions on future government decisions into account. Fiscal policy is constrained by viability conditions. An analytical solution for the time paths of debt and taxes is derived. Decreasing as well as increasing debt levels can be obtained. Conditions are given determining which of these patterns prevails. Finally, the effects of (anticipated and unanticipated) shocks in the exogenous parameters on the time path of government debt are analyzed.

Increased Pension Savings: Blessing or Curse? Social Security Reform in a Two-Sector Growth Model

This paper analyses the consequences of a switch to a more funded pension scheme for economic growth in an economy that consists of a capital-intensive commodity sector with endogenous growth and a labour-intensive services sector. The increased savings cause long-run growth to be higher in a closed economy, provided capital and labour are not strong substitutes. The reverse holds for a small open economy. More funding can therefore turn out to be a curse instead of a blessing for future generations, unless countries implement their reforms simultaneously or impose a tax on labour-intensive services.

On expectations, information and dynamic game equilibria

This paper deals with information and policy announcements in non- cooperative dynamic games. It fits in the discussion on time inconsistency of optimal policy under forward looking expectations. For some simple examples results are derived in the field of memory strategies and in the field of consistent, credible and cheating strategies.

The Case for Pay-as-You-Go Pensions in a Service Economy

The elderly consume more labour-intensive services than young individuals. This makes them vulnerable to rising costs of services due to higher wages, which can be caused by increased capital accumulation. This paper shows that in a model with a service sector, the golden-rule capital stock is lower and dynamic inefficiency is more likely to occur than in the conventional one-sector model. This implies that in many cases, a positive Pay-As-You-Go tax maximises long-run welfare in a service economy. Calculations based on data from the United Kingdom and the Netherlands show that the long-run optimal degree of funding coincides with the current situation in these countries.

Comparative Dynamics in Perfect-Foresight Models

This paper analyzes the technique of comparative dynamics (Judd, 1982) for the computation of the impact of perturbations on a steady state in a perfect-foresight model. The accuracy of this technique is demonstrated by numerical simulation experiments. Moreover, the technique is generalized to discrete-time models.

Endogenous growth and income distribution

A theory of endogenous growth is based on an investment possibility function, relating the growth rate of output to the ratio of gross investment to output and the growth rate of employment as formulated originally by M. F. Scott. Consumers maximize an intertemporal utility function and producers maximize the value of the firm. The long-run rate of growth depends on consumer preferences, the exogenous growth of labor supply and the tax rate on output. The functional distribution of income is determined along with the investment ratio in the steady state. Labor market imperfections and real wage inertia induce transition processes, which are relevant for medium term growth.