Pay-as-you-go social security in a changing environment

In this paper, we examine the optimal pay-as-you-go social security scheme which reallocates resources across generations in a changing environment, that is, with fluctuations in population growth rates and in productivity levels. We use an overlapping generations model along with a social welfare function consisting of the sum of generational utilities either unweighted or weighted by population size and a discount factor. We show how intergenerational resource sharing can be used to improve social welfare even though the extent of intergenerational redistribution is hampered by payroll tax deadweight losses in the spirit of the optimal taxation literature. Also it appears that resource sharing is much more restricted in a closed economy that in an open economy, which is not subject to a national resource constraint at each period of time. This paper was presented at the 1990 ISPE-Conference on the Fiscal Implications of an Ageing Population, Vaalsbroek Castle, Netherlands. The authors wish to thank the participants and particularly B. van Praag and W. Peters for their comments. They also thank the two referees and Philippe Michel for very helpful comments and discussions. The financial support of CIM during his sabbatical year is greatly acknowledged by the second author.