INTRODUCTION

The provision of social security to provide cover against disability and the inability to work due to old age is a feature of all developed economies. Such programmes are large, both in terms of the proportion of population receiving benefits and in terms of the total payments as a proportion of national income. The programmes are not without their difficulties. Thompson (1983) describes the adjustments made to the US programme following overly optimistic forecasts of real earnings growth. The expected increase in the ratio of retired to employed due to greater life expectancy will also place the system under pressure. There is also evidence, see Kotlikoff (1989), that social security programmes are required due to the inadequate savings and insurance purchases of the elderly which would not support them through retirement. These observations show that the analysis of social security and its economic impact is a subject of practical importance.

The first issue in the analysis of social security is its effect upon the equilibrium of the economy and, particularly, upon the level of the capital stock. If a social security programme has the form of a forced saving programme, so that consumers are provided with greater second-period earnings than they would naturally choose, then the programme may raise the capital stock. This outcome will be beneficial in an undercapitalised economy. Conversely, if the programme simply transfers earnings from those who are working to those who are retired, savings and hence the level of capital may fall.