Document Type

Working Paper

Publication Date


Working Paper Number

WP #03011, September 2001 revised March 2003 revised October 2004; Old working paper #10251


A popular view about social security, dating back to its early days of inception, is that it is a means for young, unemployed workers to "purchase" jobs from older, employed workers. The question we ask is: Can social security, by encouraging retirement and hence creating job vacancies for the young, improve the allocation of workers to jobs in the labor market? Using a standard model of labor market search, we establish that the equilibrium with no policy-induced retirement can be efficient. Even under worst-case parameterizations of our model, we find that public retirement programs pay the elderly substantially more than labor market search theory implies that their jobs are worth. An important effect, ignored by the popular view, is that the creation of a vacant job by a retirement reduces the value of other vacant jobs.

Publication Status

Published in Economic Inquiry, Vol. 42 no. 4 (October 2004): 560-571.

JEL Classification

J41, H55, J64, J26

File Format



21 pages

Included in

Economics Commons