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

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Author Info
Dirk Krueger () (University of Frankfurt)
Felix Kubler () (University of Mannheim)

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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 effcient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number 2005/12.

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Length: 35 pages
Date of creation: 12 Jan 2005
Date of revision:
Handle: RePEc:cfs:cfswop:wp200512

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Related research
Keywords: Social Security Reform; Aggregate Fluctuations; Intergenerational Risk Sharing; Incomplete Markets.;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  16. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April. [Downloadable!] (restricted)
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    Other versions:
  19. Demange, G., 2000. "On Optimality of Intergenerational Risk Sharing," DELTA Working Papers 2000-05, DELTA (Ecole normale supérieure).
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    Other versions:
  21. Robert C. Merton, 1983. "On the Role of Social Security as a Means for Efficient Risk Sharing in an Economy Where Human Capital Is Not Tradable," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 325-358 National Bureau of Economic Research, Inc. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bovenberg, A Lans & Uhlig, Harald, 2006. "Pension Systems and the Allocation of Macroeconomic Risk," CEPR Discussion Papers 5949, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Dario Caldara & Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Wen Yao, 2009. "Computing DSGE Models with Recursive Preferences," PIER Working Paper Archive 09-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Marcello D'Amato & Vincenzo Galasso, 2009. "Political Intergenerational Risk Sharing," CSEF Working Papers 216, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  4. Hans Fehr & Christian Habermann & Fabian Kindermann, 2008. "Social Security with Rational and Hyperbolic Consumers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 884-903, October. [Downloadable!] (restricted)
    Other versions:
  5. Olovsson, Conny, 2004. "The Welfare Gains of Improving Risk Sharing in Social Security," Seminar Papers 728, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  6. Gomes, Francisco J & Michaelides, Alexander, 2007. "Asset Pricing with Limited Risk Sharing and Heterogeneous Agents," CEPR Discussion Papers 6136, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Hans Fehr & Christian Habermann, 2005. "Risk Sharing and Efficiency Implications of Progressive Pension Arrangements," DNB Working Papers 064, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  8. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation, Yale University. [Downloadable!]
  9. Ennio Bilancini & Massimo D'Antoni, 2008. "Pensions and Intergenerational Risk-Sharing When Relative Consumption Matters," Department of Economics University of Siena 541, Department of Economics, University of Siena. [Downloadable!]
  10. J. C. Parra & M. Huggett, 2005. "Quantifying the Inefficiency of the US Social Security System," Computing in Economics and Finance 2005 70, Society for Computational Economics. [Downloadable!]
  11. Falilou Fall, 2004. "Pension reform, assets returns and wealth distribution," Cahiers de la Maison des Sciences Economiques v04033, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  12. Alexander Ludwig & Michael Reiter, 2008. "Sharing Demographic Risk – Who is Afraid of the Baby Bust?," MEA discussion paper series 08166, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
    Other versions:
  13. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2006. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Working Papers 12770, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Markus Knell, 2008. "The Optimal Mix Between Funded and Unfunded Pensions Systems When People Care About Relative Consumption," Working Papers 146, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  15. Caucutt, Elizabeth M. & Cooley, Thomas F. & Guner, Nezih, 2008. "The Farm, the City, and the Emergence of Social Security," IZA Discussion Papers 3731, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  16. Sydney Ludvigson, 2008. "The Research Agenda: Sydney Ludvigson on Empirical Evaluation of Economic Theories of Risk Premia," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 9(2), April. [Downloadable!]
  17. Dirk Krueger & Fabrizio Perri, 2005. "The Research Agenda: Dirk Krueger and Fabrizio Perri on Risk Sharing across Households, Generations and Countries," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 6(2), April. [Downloadable!]
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