Voiting on social security reform with heterogeneous agents

This paper analyzes the quantitative role of idiosyncratic uncertainty in an economy in which rational agents vote on hypothetical social security reforms. We construct an Overlapping Generations economy in which individuals face idiosuncratic risk with respect to their labor productivity and the labor-leisure decision is endogenous. We find that role of a pay-as-you-go social security system as a partial insurance device significantly reduces political support for a transition to an economy with a fully funded system. Also, smoother transitions have less political support than more rapid transitions. We conclude that the status quo bias in favor of an unfunded social security system is stronger in economies in which agents of similar age differ significantly with respect to labor earnings and wealth due to idiosyncratic uncertainty.