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Pareto Improving Social Security Reform when Financial Markets Are Incomplete

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  • Krüger, Dirk
  • Kubler, Felix

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 labour 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5039.

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Date of creation: May 2005
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Handle: RePEc:cpr:ceprdp:5039

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Keywords: aggregate fluctuations; incomplete markets; intergenerational risk sharing; social security reform;

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References

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