STATUS QUO PROBLEM IN SOCIAL SECURITY REFORMS

Abstract

Several papers show that a privatization of the social security system will not be politically supported by the current generations. The asymmetry in the timing of welfare gains and losses is what generates a status quo bias in favor of the unfunded system. We explore a simple mechanism to offset the status quo problem using a general-equilibrium overlapping generations model with endogenous labor supply calibrated to the Spanish economy. The mechanism implies a privatization of the social security system together with the elimination of compulsory retirement rules. Along the transition path, this mechanism drastically shortens (from three decades to only one decade) the convergence to the new steady state, diminishing the asymmetry in the timing of welfare gains and losses. As a result, there is an increase beyond 50% in the fraction of individuals that are better off with the implementation of such a reform.This work has benefited from useful comments by Jonathan Heathcote, Antonio Manresa, and seminar participants at CREB, Carlos III de Madrid, ESF Network in Social Insurance, and Stockholm School of Economics. We acknowledge financial support from Ministerio de Ciencia y Tecnología (SEC2000-0796) and Generalitat de Catalunya (SGR00-016).