Financing retirement benefits is probably the most significant fiscal challenge that governments in industrial economies will be facing in the next few decades. Social security reform has therefore become an important public policy issue for many countries and various reform proposals have been recently put forth. Given the importance of understanding the aggregate and welfare implications of different social security systems existing in the OECD, a number of recent papers have investigated the general equilibrium implications of social security reform. We follow this general equilibrium literature to analyze the aggregate and welfare implications of social security arrangements in the presence of empirically relevant market frictions and individual heterogeneity, taking care to explicitly embed in the model the main institutional, social security arrangements observed in OECD economies. Specifically, we compare the aggregate implications of defined benefit (DB) versus defined contribution (DC) systems and also investigate the economic outcomes from varying the generosity of a particular system. That is, we perform a comparison both between DB and DC systems but also within a particular system. We first broadly describe different social security systems that exist in OECD economies and attempt to classify them into categories with broadly similar institutional features. We then embed aspects of these institutional arrangements in a realistically calibrated general equilibrium life-cycle model to quantify the implications for aggregate saving and capital formation. We find that the insurance provided by a DB system can outweigh the efficiency cost from higher taxes to finance the DB payments. As a result, social welfare is maximized at positive DB provision levels. On the other hand, the fully-funded DC system that taxes an individual and offers the benefits during retirement depending on the interest rate and the individual's contributions, does not improve social (aggregate) welfare for any positive tax rate. There are two main reasons for this surprising result. First, the constraint that forces young workers to save through the DC account distorts the consumption-saving allocation sufficiently to generate consumption profiles for the poor that are substantially different from what they would have preferred in the absence of forced saving. Second, the models generate higher capital accumulation and a lower interest rate implying that saving for retirement (either through the DC or non-DC account) earns a lower rate of return that outweighs the positive effect of higher mean wages in the economy
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
335.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:335
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Find related papers by JEL classification: E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth 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
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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.:
John Y. Campbell & João F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 2001.
"Investing Retirement Wealth: A Life-Cycle Model,"
NBER Chapters,
in: Risk Aspects of Investment-Based Social Security Reform, pages 439-482
National Bureau of Economic Research, Inc.
[Downloadable!]
Angus S. Deaton & Pierre-Olivier Gourinchas & Christina Paxson, 2002.
"Social Security and Inequality over the Life Cycle,"
NBER Chapters,
in: The Distributional Aspects of Social Security and Social Security Reform, pages 115-148
National Bureau of Economic Research, Inc.
[Downloadable!]
Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Feldstein, Martin & Liebman, Jeffrey B., 2002.
"Social security,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324
Elsevier.
[Downloadable!] (restricted)
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