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Privatizing Social Security: The Role Of Imperfect Substitution Between Less And More Experienced Workers

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  • Juan A. Rojas

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Abstract

In this paper we use a large overlapping generations model with individuals that differ across age and productivity to assess the effect of privatizing a pay-as-you-go social security system in two model economies. The first one is the standard model pioneered by Auerbach and Kotlikoff (1987) characterized by the perfect substitutability in production of individuals with different experience levels. In the second one, individuals with different experience in the labor market are imperfect substitutes in production (Kremer and Thomson (1998)). The findings indicate that although in both economies the aggregate effects of removing social security are qualitatively similar, the standard model economy underestimates both the welfare losses of the individuals living at the period of the pension reform and the increase in pre-tax income inequality associated with such policy change.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we022004.

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Date of creation: May 2002
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Handle: RePEc:cte:werepe:we022004

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  1. Juan A. Rojas, . "Life-cycle Earnings Cohort Size Effects and Social Security. A Quantitative Exploration," Studies on the Spanish Economy 88, FEDEA.
  2. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 779-813, July.
  3. Hugett, M. & Ventura, G., 1997. "On the Distributional Effects of Social Security Reform," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9710, University of Western Ontario, Department of Economics.
  4. Mariacristina De Nardi & Selahattin Imrohoglu & Thomas J. Sargent, 1998. "Projected U.S. demographics and social security," Working Paper Series, Federal Reserve Bank of Chicago WP-98-14, Federal Reserve Bank of Chicago.
  5. Lawrence F. Katz & Kevin M. Murphy, 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," NBER Working Papers 3927, National Bureau of Economic Research, Inc.
  6. Berger, Mark C, 1985. "The Effect of Cohort Size on Earnings Growth: A Reexamination of the Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(3), pages 561-73, June.
  7. Luis A. Puch & Omar Licandro, 1997. "Are there any special features in the Spanish business cycle?," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 21(2), pages 361-394, May.
  8. Michele Boldrin & Juan J. Dolado & Juan F. Jimeno & Franco Peracchi, 1999. "The future of pensions in Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 14(29), pages 287-320, October.
  9. Luis Puch & Omar Licandro, . "Are there any special features in the Spanish business cycles?," Working Papers 97-06, FEDEA.
  10. Richard B. Freeman, 1979. "The Effect of Demographic Factors on Age-Earnings Profiles," Journal of Human Resources, University of Wisconsin Press, vol. 14(3), pages 289-318.
  11. Begoña Eguía & Cruz Echevarría, . "Existe alguna relación entre las tasas de desempleo y la estructura demográfica en España?," Studies on the Spanish Economy 11, FEDEA.
  12. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, Springer, vol. 6(1), pages 83-114, June.
  13. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(1), pages 285-326, February.
  14. Peter A. Diamond, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(3), pages 67-88, Summer.
  15. Aiyer, Sri-Ram, 1997. "Pension reform in Latin America : quick fixes or sustainable reform?," Policy Research Working Paper Series 1865, The World Bank.
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