Social Security Fund, Population Growth, and Economic Growth Under Idiosyncratic Productivity Shocks

ABSTRACT This paper examines the effects of the social security fund on long‐run economic growth and welfare in an overlapping generations economy with incomplete capital markets and idiosyncratic productivity shocks. The presence of a social security fund reserve affects capital accumulation by partly offsetting the crowding‐out effect of social security through public investment. Under incomplete capital markets, social security improves welfare by providing social insurance against idiosyncratic risks. We show that these growth and insurance effects of social security jointly improve welfare for all generations if the initial labor income share is sufficiently large.