Designing the Optimal Social Security Pension System

We extend a standard overlapping-generations general-equilibrium model with idiosyncratic working ability shocks to design the optimal social security pension system. There are two main features in our approach. First, we keep track of individual social security wealth explicitly so that we can evaluate a wide range of policies, including “private accounts,” seamlessly. Second, we express our social security benefit function with two key parameters—one for intragenerational income redistribution and another for intergenerational income transfers. We find that the system would be optimal if benefits were proportional to individual social security wealth but on average less than actuarially fair. JEL Classification Numbers: D52, D58, D91, E21, E62, H31, H55.