The effects of social security on growth in debt-constrained economies

Abstract

All too often, asset markets’ imperfections raise borrowing constraints that young people face when they contract loans. The distortions to the allocation of resources that debt constraints cause have led to the intervention of the public sector in an attempt to apply an intergenerational transfer policy that will mitigate them. Social security is such a policy which affects incentives to save and educate thus affecting welfare and growth. However, in the presence of a social security policy borrowing constraints arise endogenously as an outcome of rationality constraints. In this thesis, I examine the impact of a social security policy on the long-run growth employing two different pension schemes (unfunded and fully funded) and directly comparing results that arise from exogenous and endogenous borrowing constraints setup. Under parametric analysis some results are vague and for this reason a numerical analysis becomes necessary.