Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 535: What Are the Gains from Pension Reform?

Assar Lindbeck () and Mats Persson ()
Additional contact information
Assar Lindbeck: The Research Institute of Industrial Economics, Postal: P.O. Box 5501, SE-114 85 Stockholm
Mats Persson: Institute for International Economic Studies, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: This paper presents a unified analytical framework for the analysis of social security reform. It discusses reform along two dimensions: Pay-As-You-Go versus fully funded on the one hand, and actuarial versus non-actuarial on the other. Making the system more actuarial entails a trade-off between less distorted work incentives and intra-generational redistribution. Increasing the degree of funding entails a trade-off between more distorted work incentives, and redistribution in favor of future generations. If a PAYGO system already has strong actuarial elements, the additional welfare gain from making it fully funded derives from the possibility of portfolio diversification.

Keywords: Pension reform; social security; funded pensions; work incentives; saving

JEL-codes: H55

28 pages, July 5, 2000

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