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Pension Reform and Endogenous Borrowing Constraints

Listed author(s):
  • Juan Rojas
  • Carlos Urrutia

In this paper we study the quantitative properties of alternative social security regimes in a large overlapping generations model where households face uninsurable idiosyncratic income shocks. We study this issue in two model economies. The first is the standard one characterized by exogenous borrowing constraints. In the second one, because of the lack of commitment, these constraints are endogenously determined by the incentives to default on previous debts. We find that when the borrowing constraints are exogenous, changing the social security replacement rate from 44% to 0% increases the capital-output ratio and the saving rate by 44.3% in line with the predictions of quantitative OLG models without population growth. In contrast, when the borrowing constraints are endogenous, such policy change would increase the aggregate capital stock and the saving rate by 25%. The reason is that although without social security households save more for retirement and for precautionary reasons in order to insure against income risk, the magnitude of the latter is reduced since the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 413.

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Date of creation: 2004
Handle: RePEc:red:sed004:413
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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