Aggregate Implications of Defined Benefit and Defined Contribution Systems

One of the most significant fiscal challenges facing governments in the next few decades is the financing of retirement benefits. Due to this challenge, governments are considering a variety of social security reforms. This paper investigates the implications of different reforms for a nation’s economy and for the welfare of its citizens. Specifically, the authors explore the economic outcomes of PAYGO defined benefit (DB) systems and mandatory, funded defined contribution (DC) systems. The authors pay particular attention to a country’s political and economic structure, as this structure can influence the nature and extent of reforms. For example, some systems are more conducive to incremental reforms, while others may be open to sweeping changes.