In many countries, social security systems face obvious challenges, yet little has been done about it so far. That is either because it is not possible to muster political support for it, or because politicians believe that is not possible. Let us have a look at this using some theory.
Georges Casamatta and João Gondim use a continuous time overlapping generations model to study out the parameters of a pay-as-you-go system can be modified in the face of a permanent negative fertility shock. cutting pensions benefits or delaying the retirement age find a majority of supporters, increasing the contribution rate does not. A critical aspect here is the status quo: an increase in the income tax necessary to balance the social security budget. Too often, people compare a reform to the current policy, instead of thinking what emergency reform would have to be performed once the shock has impacted.
People favor a cut in benefits even though it decreases their lifetime consumption because it gives a better stream of consumption through their life cycle, i.e., they are fine with having more now and less alter. Which also means an increase in the payroll tax is not acceptable. And an increase in the retirement age achieves the same objective, again compared to a status quo with a high tax rate, and also to the two other policy moves.
This assumed the changes in policy were applied at the moment the fertility shock happened. Delaying it changes preferences, and depending on demographics, things can go towards favoring one or the other policy change.
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