Working Paper: CEPR ID: DP5039
Authors: Dirk Krueger; Felix Kübler
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 labour 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.
Keywords: Aggregate fluctuations; Incomplete markets; Intergenerational risk sharing; Social security reform
JEL Codes: D58; D91; E62; H31; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social security (H55) | welfare (I38) |
| capital crowding out (E62) | welfare (I38) |
| social security (H55) | intergenerational risk sharing (D15) |
| intergenerational risk sharing (D15) | welfare (I38) |
| capital crowding out + social security (E62) | welfare (I38) |
| risk aversion (D81) | welfare gains from social security (H55) |
| intertemporal elasticity of substitution (D15) | welfare gains from social security (H55) |