Welfare Measures in a Stochastic Production Economy with Overlapping Generations: An Application to Social Security Reform

Published: 2003
Project ID: UM03-12


General-equilibrium analyses of Social Security reforms have usually been analyzed using either deterministic models or models with idiosyncratic wage shocks. Since aggregate uncertainty does not exist in these models, prices can be perfectly forecasted. As a result, stocks and bonds are perfect substitutes and so cannot be modeled independently. Models without aggregate uncertainty, therefore, cannot be used to value risk or examine the gains to risk sharing stemming from incomplete trading markets between generations. This project develops an aggregate uncertainty model as well as corresponding welfare measures that can be used to analyze Social Security reforms (personal accounts; investing trust fund in equities; guarantees) in general equilibrium.



Kent Smetters