Aggregate implications of defined benefit and defined contribution systems

Francisco Gomes and Alexander Michaelides

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We use a general equilibrium life-cycle model with incomplete markets and heterogeneous agents to evaluate the macroeconomic and welfare implications of Defined Benefit (DB) versus Defined Contribution (DC) systems, and to investigate the effects of incremental reform within a particular system. Extensive calibrations illustrate the trade-off between efficiency and redistribution that a tax-financed, DB social security system generates. We find that social welfare is maximized for small but positive levels of DB because of the redistributive value associated with these systems. On the other hand, steady-state within- DC system comparisons reveal that a zero DC tax rate maximizes social welfare.

Keywords: general equilibrium; liquidity constraints; heterogeneous agents; undiversifiable labor income; defined benefit systems; defined contribution systems (search for similar items in EconPapers)
JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2003-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Aggregate Implications of Defined Benefit and Defined Contribution Systems (2004)
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