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
Date Written: September 2003
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
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