Center for Retirement Research
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TITLE:
Aggregate Implications of Defined Benefit and Defined Contribution Systems
AUTHOR(S):
Francisco Gomes
Alexander Michaelides
DOCUMENT TYPE: Article
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Executive summary
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 effects 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.