SOCIAL SECURITY IN A MODEL WITH ALTRUISTIC BEQUEST AND DIFFERENTIAL LIFETIME UNCERTAINTY AND ABILITY

In this paper we evaluate the impact of social security on capital accumulation and welfare in an environment with differential lifespan uncertainty and age-efficiency profiles induced by a generational `ability shock'. We construct a general equilibrium model populated with overlapping generations of finite but random-lived individuals facing borrowing constraints and individual income shocks. Preferences are altruistic: individuals derive utility from their own lifetime consumption and from the felicity of their predecessors and descendents. For a newborn, the realization of the generationally-persistent ability shock not only determines his age-efficiency profile, but his type-dependent vector of conditional survival probabilities. We find that (\QTR{it}{i}) aggregate capital is resilient to social security reform, (\QTR{it}{ii}) new borns prefer to be born into an economy with no social security, (\QTR{it}{iii}) when the welfare measure is conditioned on the agent type some agents prefer to be born in an economy with social security though (iv) they are willing to pay the transitional costs towards privatization if their ability is low.