Pareto-Improving Social Security Reform when Financial Markets Are Incomplete!?

Abstract

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated, a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto-improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

A Life-Cycle Analysis of Social Security with Housing

“…For a homeowner with debt …nancing, this implies a lower interest payment and, thus, a lower cost of debt …nancing. 28 As a result, both types of homeowners tend to consume more housing services. Note that a fall in the cost of debt …nancing corresponds to a fall in the mortgage interest payments in the real economy, where mortgage contracts are widely used.…”

Pensions, Debt and Inflation Risk in a Monetary Union

“…In this way I incorporate the fact that a PAYG pension scheme also serves as a risk-sharing and diversification device. PAYG pensions therefore have a comparable role as in the literature that focuses on the intergenerational risk-sharing properties of PAYG pension schemes, see for example Storesletten et al (1999), Matsen and Thøgersen (2004), Krueger and Kubler (2006) and Miles andČerný (2006) 5 .…”

“…The major advantage of the stochastic general equilibrium model in this paper is that it is quite tractable, which allows us to focus on the main mechanisms that drive the results. Most papers that develop stochastic general equilibrium OLG models use computable models (e.g., Storesletten et al (1999), Sánchez-Marcos and Sánchez-Martin (2006), and Krueger and Kubler (2006)). There are a few papers that develop an analytical stochastic general equilibrium OLG model, like Bohn (2001Bohn ( , 2009) and Beetsma and Bovenberg (2009).…”

Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results

“…Following Krüger and Kübler (2006), Storesletten, Telmer, and Yaron (2007), Gomes and Michaelides (2008) and others we assume that the depreciation rate of physical capital, δ K t , is stochastic. The capital stock, K t , is financed by issuing stocks and bonds in quantities S t and B t , so that K t = S t + B t = S t (1 + ℓ) where ℓ is an exogenous and constant leverage ratio (debt-equity ratio).…”