Life-cycle effects of social security in an open economy: A theoretical and empirical survey

Conventional wisdom views demographic change as a set of exogenous shocks impinging on social security, with the economy treated as a closed system. This contribution argues that demographics is nothing but the aggregate of individual decisions, which are influenced by social security. This claim is supported by both theoretical argument and empirical evidence with regard to decisions over the life cycle, ranging from educational effort, marriage, number of children, divorce, retirement, and effort to extend one's life. Distinguishing the effects of contributions and benefits of social security, these feedback relationships are shown to in the main hamper employment and growth, thus undermining the financial viability of today's social security schemes, with increasing openness of the economy (`globalization') exacerbating problems.