TY  - JOUR
AU  - Krueger,Dirk
AU  - Kubler,Felix
TI  - Pareto Improving Social Security Reform when Financial Markets are Incomplete?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9410
PY  - 2003
Y2  - January 2003
UR  - http://www.nber.org/papers/w9410
L1  - http://www.nber.org/papers/w9410.pdf
N1  - Author contact info:
Dirk Krueger
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-6691
Fax: 215/573-2057
E-Mail: dkrueger@econ.upenn.edu

Felix Kubler
University of Zurich
Plattenstrasse 32
CH-8032 Zurich
Switzerland
E-Mail: fkubler@gmail.com
AB  - This paper studies an Overlapping Generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system can lead to a Pareto improvement. When returns to capital and wages are imperfectly correlated, the consumption variance of all generations can be reduced if government policies enable them to pool labor and capital incomes. A social security system that endows retired households with a claim to labor income may serve as an effective tool to share aggregate risk between generations. Our quantitative analysis shows that, first, abstracting from the crowding-out effect of social security on the aggregate stock in general equilibrium, the introduction of social security does indeed represent a Pareto improving reform, if households are both fairly risk-averse and fairly willing to intertemporally substitute consumption. Second, the severity of the capital crowding-out effect in general equilibrium overturns these gains for degrees of risk aversion and intertemporal elasticity of substitution commonly used in the literature.
ER  -