Partially Funded Social Security and Inter-Generational Distribution

Abstract

This paper introduces a parametric model of partially funded social security system and analyzes inter-generational distribution of consumption and welfare in an OLG general equilibrium. This paper specifically aims to examine the effects of transition toward more funded system on saving and capital accumulation. It is shown that an increase in intensity of fundedness increases capital accumulation unless the income effect from interest rate change outweighs other effects and negatively affects the total saving severely. By deriving closed form solutions for the variables, this paper finds that an increase in the intensity of fundedness increases saving but decreases consumption, when population growth rate is greater than the net return to capital. This paper also finds that for a partially funded system, an increase in tax rate increases public saving but reduces private saving unambiguously, while the effects on consumption and capital accumulation are not conclusive.