Social Security Reform with Imperfect Substitution between Less and More Experienced Workers

23 Pages Posted: 27 Jan 2009

Date Written: January 27, 2009

Abstract

In this paper we study the quantitative properties of a policy reform aimed at funding the pension system in the standard model economy with perfect substitution across workers with different experience levels and a model economy where this substitutability is imperfect. With compulsory retirement, the welfare gains for young cohorts are underestimated in the standard model economy with perfect substitution as compared to the imperfect substitution case. However these additional welfare gains displayed in the imperfect substitution case come at the cost of higher welfare losses for the generations living at the time of the policy reform, due to the fall in the experience premium that follows after the elimination of social security. When the policy reform consists of the elimination of both social security and compulsory retirement, we find that in the standard model the status quo problem disappears. However, such policy change is not able to solve the status quo problem when less and more experienced workers are imperfect substitutes because the fall in the experience premium is more pronounced, providing a rationale for the lack of political support in favour of pension reform in the Spanish economy.

Keywords: Social Security, overlapping generations

JEL Classification: E62, H55, J11

Suggested Citation

Rojas, Juan A., Social Security Reform with Imperfect Substitution between Less and More Experienced Workers (January 27, 2009). Banco de Espana Working Paper No. 0832, Available at SSRN: https://ssrn.com/abstract=1333536 or http://dx.doi.org/10.2139/ssrn.1333536

Juan A. Rojas (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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