Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?
Krueger, Dirk, and
Felix Kubler. 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?."
American Economic Review,
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,
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