| This thesis calculates the welfare gain from replacing the present social security system in the U.S. with a system based on mandatory savings. The goal of the mandatory savings plan is to deal with the moral hazard problem created by unobservable heterogeneity in skill across households, combined with the time inconsistency problem of government policy. The time inconsistency problem prevents the government from credibly committing to let consumption of the elderly fall below a minimum threshold. The paper uses a quantitative general equilibrium model of overlapping generations to assess the impact of switching from the current social security to a system based on mandatory savings. The model, where households differ in terms of skills and parents are altruistic towards their children, is simulated using the current social security and income tax systems. Steady state consumption is about 9.7% higher in the economy with mandatory savings, driven mainly by an approximately 17.6% increase in the capital stock. The distributional impact of the mandatory savings plan is small, with the gini coefficient for income distribution declining from 0.26 to 0.24. |
