Aggregate Implications of Defined Benefit and Defined Contribution Systems

Boston College Center for Retirement Research Working Paper No. 2003-16

51 Pages Posted: 10 Jun 2004

See all articles by Francisco Gomes

Francisco Gomes

London Business School

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: September 2003

Abstract

We use a general equilibrium life-cycle model with incomplete markets and heterogeneous agents to evaluate the macroeconomic and welfare implications of Defined Benefit (DB) versus Defined Contribution (DC) systems, and to investigate the effects of incremental reform within a particular system. Extensive calibrations illustrate the trade-off between effciency and redistribution that a tax-financed, DB social security system generates. We find that social welfare is maximized for small but positive levels of DB because of the redistributive value associated with these systems. On the other hand, steady-state within-DC system comparisons reveal that a zero DC tax rate maximizes social welfare.

Keywords: General Equilibrium, Liquidity Constraints, Heterogeneous Agents, Undiversifiable Labor Income, Defined Benefit Systems, Defined Contribution Systems

JEL Classification: E21, E62, H55

Suggested Citation

Gomes, Francisco and Michaelides, Alexander, Aggregate Implications of Defined Benefit and Defined Contribution Systems (September 2003). Boston College Center for Retirement Research Working Paper No. 2003-16, Available at SSRN: https://ssrn.com/abstract=555864 or http://dx.doi.org/10.2139/ssrn.555864

Francisco Gomes (Contact Author)

London Business School ( email )

Finance Department
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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