| The purpose of this study is to examine the principles and criteria by which public pension programs should be designed and the economic effects of these programs. More specifically, our study consists of three parts. In Part I, we develop the economic theory of public pensions. In Part II, we analyze the influence of the demographic and economic environment on the cost of public pensions. In Part III, we analyze the influence of public pensions on the economy.;In the second part of our study, we examine the feasibility of the "optimal" (in the sense of second-best) public pension system that we derived in Part I; that is, we try to discover the range of the potential costs of such a program. To do that, we develop a mathematical model of the pension system and try to determine the influence of certain economic and demographic variables on the cost of the program.;In the third part of our study, we examine the influence that a public pension system exercises on the aggregate levels of income and the capital stock through its effect on the ratio of aggregate saving to aggregate income. It is suggested that the social security wealth variable which has been constructed by Martin Feldstein overestimates the amount of wealth generated by the public pension system. A new social security wealth variable is constructed and it is used to estimate the effect of the U.S. Old-Age and Survivors Insurance (OASI) program on capital formation and economic growth in the American economy. Our results show that when this effect is estimated on the basis of single-equation consumption functions the estimates are sensitive to the specification of the consumption function. We try to estimate the impact of the OASI program on capital formation by using a long-run economic model of the U.S. economy, which is estimated simultaneously. Moreover, this model serves as the basis for simulation which is used to determine what the capital-labor ratio for the American economy would have been if the OASI program had not been established. Taken as a whole, the results of our econometric studies suggest that the operation of the U.S. OASI program has reduced capital formation by about 10 to 15 percent.;In the first part of our study, we try to develop the economic rationale of public pensions by using a normative analysis which takes explicitly into consideration the basic objectives of, what we have called, dynamic pensions. Old-age pensions are viewed as a social institution whose main purpose is to provide, to all qualifying individuals during their retirement years, an income stream which is (1) continuous, (2) adequate, (3) constant in terms of purchasing power, and (4) capable of maintaining the socio-economic position of the retired. It is shown that the basic characteristics of a pension system that satisfies these four objectives may be explained either as the result of deviations from the duality conditions for economic efficiency or as attempts to compensate by other social institutions for market failures. |
