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

Dirk Krueger and Felix Kubler

American Economic Review, 2006, vol. 96, issue 3, 737-755

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. (JEL D58, D91, E62, H31, H55)

Date: 2006
Note: DOI: 10.1257/aer.96.3.737
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Working Paper: Pareto Improving Social Security Reform when Financial Markets Are Incomplete (2005)
Working Paper: Pareto Improving Social Security Reform when Financial Markets are Incomplete? (2003)
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