Social security as an economic stabilization program

This paper analyzes the stabilizing properties of an unfunded social security system in an overlapping generations model with cyclical equilibria This provides a welfare rationale for a social security system independent of the windfall gained by the first generation, or social insurance arguments. An unfunded social security system redirects intergenerational resource transfers from private savings, which are subject to endogenous fluctuations, towards a public system with an implicit rate of return of unity. In an economy with a cycle of order 2, a planner with a limit-of-means social welfare function will completely stabilize the economy.