The extension of social security coverage in developing countries
Links to Fileshttps://ideas.repec.org/p/tow/wpaper/2011-06.html
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Type of Workapplication/pdf
DepartmentTowson University. Department of Economics
Citation of Original PublicationJuergen Jung & Chung Tran, 2011. "The Extension of Social Security Coverage in Developing Countries," Working Papers 2011-06, Towson University, Department of Economics, revised Nov 2011.
SubjectsInformal sector (Economics)
Family social safety nets
We study the dynamic general equilibrium effects of introducing a social pension pro- gram to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risk. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.