Capital-Skill Complementarity and the Redistributive Effects of Social Security Reform

Abstract

This Paper analyses the general equilibrium implications of reforming pay-as-you-go pension systems in an economy with heterogeneous agents, human capital investment and capital-skill complementarity. It shows that increasing funding in the long-run delivers higher physical and human capital and therefore higher output, but also higher wage and income inequality. The latter affects preferences over the degree of redistribution of the remaining pay-as-you-go component: Despite the greater role that redistribution could perform in the new steady state, we find a preference for lower redistribution for a larger group of the population.