The interplay between trade unions and the social security system in an aging economy

This paper investigates how demographic change affects the financial sustainability of a pay-as-you-go social security system in an environment with collective bargaining on the labor market. Partial equilibrium analysis shows that the contribution rate or the benefit level decreases, if the old-age dependency ratio rises. The government balances the social security budget by aiming indirectly at a higher level of employment. In general equilibrium the opposite applies. The government increases the contribution rate (defined benefit) or the benefit level (defined contribution) due to additional effects of demographic change on capital accumulation and labor demand. In contrast to a perfect labor market scenario, the imposed financing burden from an aging society is overcompensated by favorable labor market effects on the social security budget.