Social security reform : the capital accumulation and intergenerational distribution effect

Reforming the social security system has received increasing attention in recent years. This paper studies a switch from an unfunded defined-benefit system (pay-as-you-go) to a fully-funded defined-contribution system in a stable demographic environment. While the former finances current pensions with current social security taxes which are not perceived as linked to the benefits, the latter finances the pensions out of the funds accumulated in special accounts for retirement purposes. Therefore, the contributions are directly linked to the benefits. The paper describes the theoretical model and discusses the data for the calibration. The model is calibrated to resemble the Mexican economy and indicates how the reform is actually carried out and the alternatives of the government to finance the transition. The simulation results are presented and the main results are summarized.