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(UBS Pensions series 18) Aggregate Implications of Defined Benefit and Defined Contribution Systems

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  • Alex Michaelides
  • Francisco Gomes

Abstract

We use a general equilibrium life-cycle model with incomplete markets and heterogeneous agents to evaluate the macroeconomic and welfare implications of Defined Benefit (DB) versus Defined Contribution (DC) systems, and to investigate the e.ects of incremental reform within a particular system. Extensive calibrations illustrate the trade-off between effciency and redistribution that a tax-financed, DB social security system generates. We find that social welfare is maximized for small but positive levels of DB because of the redistributive value associated with these systems. On the other hand, steady-state within DC system comparisons reveal that a zero DC tax rate maximizes social welfare.

Suggested Citation

  • Alex Michaelides & Francisco Gomes, 2003. "(UBS Pensions series 18) Aggregate Implications of Defined Benefit and Defined Contribution Systems," FMG Discussion Papers dp469, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp469
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