Pareto Improving Social Security Reform When Financial Markets are Incomplete!?

CFS Working Paper No. 2005/12

Posted: 6 May 2005

See all articles by Dirk Krueger

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Felix Kubler

University of Zurich; Swiss Finance Institute

Date Written: April 2005

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 labor 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.

Keywords: Social Security Reform, Aggregate Fluctuations, Intergenerational Risk Sharing, Incomplete Markets

JEL Classification: E62, H55, H31, D91, D58

Suggested Citation

Krueger, Dirk and Kubler, Felix E., Pareto Improving Social Security Reform When Financial Markets are Incomplete!? (April 2005). CFS Working Paper No. 2005/12, Available at SSRN: https://ssrn.com/abstract=716042

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Felix E. Kubler

University of Zurich ( email )

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Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

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