Social security spending and economic growth: An empirical investigation for Turkey using grander causality analysis

Abstract

This study analyse Granger causality between social security spending and economic growth in Turkey between 1965 and 2005. Many economic growth models indicate that social security expenditures which have purely redistributive policies have a negative effect on economic growth. These expenditures that financed with distortionary taxes reduce national savings and investments. On the other hand, some models predict the opposite effect. According to this, social security expenditure has a positive effect on economic growth, since these expenditures induce people to retire early which in turn increase productivity and growth. Many empirical works have been carried out finding mixed results on the subject. Analysing social security expenditure and economic growth in Turkey shows us both have increasing trends as it is in many other countries. In this study, we aim to investigate that is it social security expenditure leading to economic growth or economic growth increasing the social security spending? Granger causality test is applied in order to find the direction of causality in Turkey between 1965 and 2005. The result shows that while social security spending affects economic growth, economic growth does not have a significant impact on social security spending. Direction of causality is running from social security to economic growth.