DP5039 Pareto Improving Social Security Reform when Financial Markets Are Incomplete
|Author(s):||Dirk Krueger, Felix Kübler|
|Publication Date:||May 2005|
|Keyword(s):||aggregate fluctuations, incomplete markets, intergenerational risk sharing, social security reform|
|JEL(s):||D58, D91, E62, H31, H55|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5039|
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.