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Social Security reform with imperfect substitution between less and more experienced workers

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  • Juan A. Rojas

    () (Banco de España)

Abstract

In this paper we study the quantitative properties of a policy reform aimed at funding the pension system in the standard model economy with perfect substitution across workers with different experience levels and a model economy where this substitutability is imperfect. With compulsory retirement, the welfare gains for young cohorts are underestimated in the standard model economy with perfect substitution as compared to the imperfect substitution case. However these additional welfare gains displayed in the imperfect substitution case come at the cost of higher welfare losses for the generations living at the time of the policy reform, due to the fall in the experience premium that follows after the elimination of social security. When the policy reform consists of the elimination of both social security and compulsory retirement, we find that in the standard model the status quo problem disappears. However, such policy change is not able to solve the status quo problem when less and more experienced workers are imperfect substitutes because the fall in the experience premium is more pronounced, providing a rationale for the lack of political support in favour of pension reform in the Spanish economy.

Suggested Citation

  • Juan A. Rojas, 2009. "Social Security reform with imperfect substitution between less and more experienced workers," Working Papers 0832, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0832
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0832e.pdf
    File Function: First version, January 2009
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    References listed on IDEAS

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    Cited by:

    1. Cassou, Steven P. & Gorostiaga, Arantza & Uribe-Zubiaga, Iker, 2013. "Policy effects of the elasticity of substitution across labor types in life cycle models," Economic Modelling, Elsevier, vol. 35(C), pages 59-70.

    More about this item

    Keywords

    Social Security; overlapping generations;

    JEL classification:

    • 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
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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