Discussion Paper Details

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Title: Pareto Improving Social Security Reform when Financial Markets Are Incomplete

Author(s): Dirk Krueger and Felix Kübler

Publication Date: May 2005

Keyword(s): aggregate fluctuations, incomplete markets, intergenerational risk sharing and social security reform

Programme Area(s): Public Economics

Abstract: This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labour income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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Bibliographic Reference

Krueger, D and Kübler, F. 2005. 'Pareto Improving Social Security Reform when Financial Markets Are Incomplete'. London, Centre for Economic Policy Research.