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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. Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers 1580, Harvard - Institute of Economic Research.
  2. Juan A. Rojas, . "Life-cycle Earnings Cohort Size Effects and Social Security. A Quantitative Exploration," Studies on the Spanish Economy 88, FEDEA.
  3. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
  4. Dolado, Juan José & Jimeno, Juan F. & Boldrin, Michele & Peracchi, Franco, . "The Future of Pensions in Europe," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3271, Universidad Carlos III de Madrid.
  5. Luis A. Puch & Omar Licandro, 1997. "Are there any special features in the Spanish business cycle?," Investigaciones Economicas, Fundación SEPI, vol. 21(2), pages 361-394, May.
  6. Mariacristina De Nardi & Selahattin Imrohoglu & Thomas J. Sargent, 1998. "Projected U.S. demographics and social security," Working Paper Series WP-98-14, Federal Reserve Bank of Chicago.
  7. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  8. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  9. Richard B. Freeman, 1979. "The Effect of Demographic Factors on Age-Earnings Profiles," NBER Working Papers 0316, National Bureau of Economic Research, Inc.
  10. 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.
  11. Mark Huggett & Gustavo Ventura, 1999. "On the Distributional Effects of Social Security Reform," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 498-531, July.
  12. 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, vol. 93(3), pages 561-73, June.
  13. Peter A. Diamond, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 67-88, Summer.
  14. 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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