A politically feasible social security reform with a two-tier structure

Yamada, Tomoaki—A politically feasible social security reform with a two-tier structure This paper investigates the welfare implications and political feasibility of social security reforms with a two-tier structure in Japan. We evaluate social security reforms from two points of view: (i) the ex-ante expected value of future generations, and (ii) whether current generations prefer reform to the status-quo system, which we call political feasibility. To evaluate the reforms, we use a largescale overlapping generations model with idiosyncratic income risk and a two-tier structure. The first tier guarantees a basic pension and the second tier consists of the earnings-related part. Calibrating the parameters of the model to the Japanese economy, we compute the transition path and the two welfare criteria. We find that, given the two-tier structure in Japan, an increase in the basic pension and the abolition of the earnings-related part of the social security system improve the welfare of future generations, and ensures political feasibility when a consumption tax is the source of revenue. J. Japanese Int. Economies 25 (3) (2011) 199–224. School of Commerce, Meiji University, 1-1, Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan. 2011 Elsevier Inc. All rights reserved.