Social Security Design and its Political Support

The design of social security systems has implications not only for households’ saving and labor supply choices, but also for the political support of intergenerational transfers. We examine the effects of making pension benefits dependent on —or independent of — labor market participation, as well as the level of redistribution, on the social security tax rate, labor supply, and capital accumulation. We conduct two numerical evaluations of the model’s performance. First, it can explain almost two thirds of the observed increase in pension spending following Argentina’s 2005-2010 reforms aimed at universalizing coverage. Second, the model predicts that a persistent shift in work preferences following the COVID-19 pandemic in the U.S. would result in a 1.8 p.p. increase in the social security tax rate.