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Social security reform, income disribution, fiscal policy, and capital accumulation

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  • Serrano, Carlos
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    Abstract

    The author explores the effects a transition from a pay-as-you-go (PAYG) social security system to a fully funded system may have on income distribution, fiscal policy, and capital accumulation. The author presents a heterogeneous agent model developed to study the transition from a state-managed pay-as-you-go social security system to a privately managed fully funded system. He assumesthat agents can differ in their human capital endowments and in their access to the financial system. The author finds that, for some initial distributions, when access to the financial system is restricted for some individuals, income distribution may improve with privatization of the pension system. Where there is complete access to the financial system before reform, however, income distribution deteriorates in all cases. Regardless of the initial distributions, reform of the type described here increases the level of physical capital in the economy. But the increase will be larger the larger the fraction of the population composed of poor individuals, or the higher their level of human capital. The author also finds that different initial distributions will have different effects on the fiscal policy needed to finance reform. Similarly, different forms of reform financing will have different effects on intragenerational distribution. In the case in which government decides to maintain a constant level of debt, generations alive when the reform takes place will have lower lifetime earnings than those born after them. The author also finds that the taxes needed to pay for transitional workers'pensions will be higher when the fraction of the population with access to the financial system in the PAYG equilibrium is higher.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2055.

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    Date of creation: 28 Feb 1999
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    Handle: RePEc:wbk:wbrwps:2055

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    Keywords: Environmental Economics&Policies; Banks&Banking Reform; Payment Systems&Infrastructure; Economic Theory&Research; Fiscal&Monetary Policy; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Governance Indicators; International Terrorism&Counterterrorism;

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    1. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
    2. Arrau, Patricio, 1990. "Social security reform : the capital accumulation and intergenerational distribution effect," Policy Research Working Paper Series 512, The World Bank.
    3. Corsetti, Giancarlo & Schmidt-Hebbel, Klaus, 1995. "Pension reform and growth," Policy Research Working Paper Series 1471, The World Bank.
    4. Laurence J. Kotlikoff, 1996. "Privatization of Social Security: How It Works and Why It Matters," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 1-32 National Bureau of Economic Research, Inc.
    5. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
    6. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    7. William Perraudin & Thierry Pujol, 1994. "Framework for the Analysis of Pension and Unemployment Benefit Reform in Poland," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 643-674, December.
    8. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association, vol. 45(1), pages 1-22, March.
    9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
    10. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Salvador Valdés & Peter Diamond, . "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    12. Peter A. Diamond, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 67-88, Summer.
    13. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
    14. Carlos Sales-Sarrapy & Fernando Solis-Soberon & Alejandro Villagomez-Amezcua, 1998. "Pension System Reform: The Mexican Case," NBER Chapters, in: Privatizing Social Security, pages 135-175 National Bureau of Economic Research, Inc.
    15. Queisser, Monika, 1996. "Pensions in Germany," Policy Research Working Paper Series 1664, The World Bank.
    16. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
    17. Burkhauser, Richard V & Warlick, Jennifer L, 1981. "Disentangling the Annuity from the Redistributive Aspects of Social Security in the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 27(4), pages 401-21, December.
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