Pareto Improving Social Security Reform When Financial Markets are Incomplete!?
CFS Working Paper No. 2005/12
Posted: 6 May 2005
Date Written: April 2005
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: Suggested Citation