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OPTIMAL FISCAL POLICY IN THE DESIGN OF SOCIAL SECURITY REFORMS *
Author(s) -
Conesa Juan C.,
Garriga Carlos
Publication year - 2008
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2008.00480.x
Subject(s) - economics , social security , welfare , pareto principle , social welfare , fiscal policy , space (punctuation) , microeconomics , public economics , macroeconomics , market economy , computer science , operations management , political science , law , operating system
The quantitative literature has documented that a privatization of the social security system generates large long‐run welfare gains at the cost of welfare losses for transition generations. In this article, we maximize over the entire policy space, following the optimal fiscal policy approach. The resulting allocation, by construction, lies on the constrained Pareto frontier. We find that the optimal design of reforms exhibits sizeable welfare gains arising from a reduction in labor supply distortions. In contrast, the welfare gains coming from the reduction of savings distortions are relatively small.