Social security and risk sharing

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Abstract

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex ante Pareto-improving in a stochastic OLG economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model financial markets are complete and competitive equilibria interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agentsʼ welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing. We also examine the optimal size of a given social security system as well as its optimal reform.

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We thank seminar participants at various universities and conferences and in particular Subir Chattophadyay, Gabrielle Demange, Georges de Menil and Narayana Kocherlakota for helpful comments and discussions. We particularly thank the associate editor and two referees for their comments.

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