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Working Paper

Altruism, Borrowing Constraints, and Social Security

We show how intergenerational altruism and borrowing constraints shape the interest rate, savings, and welfare response to funded and unfunded social security programs. Borrowing constraints pin down the optimal timing of altruistic intergenerational transfers and thereby alter the implications of intergenerational altruism for fiscal policy. Regardless of whether parent-to-child altruistic transfer motives operate, borrowing constraints imply effects of social security programs that deviate greatly from the effects in Ricardian and traditional life-cycle environments. If, however, child-to-parent altruistic gift motives operate in at least some families, social security programs are neutral in their impact on the interest rate, though not necessarily in their impact on consumption. This interest-rate neutrality result holds regardless of whether borrowing constraints bind, regardless of whether parent-to-child transfers operate, and regardless of whether exchange motives for intergenerational transfer are important.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Altig, David, and Steven J. Davis. 1989. “Altruism, Borrowing Constraints, and Social Security.” Federal Reserve Bank of Cleveland, Working Paper No. 89-18.