Effects of eliminating the unfunded social security system in an economy with entrepreneurs

UnrestrictedThis study investigates the effects of eliminating the unfunded social security on an economy with entrepreneurs in the presence of individual income and lifespan uncertainties by using two different models, an infinite horizon and a pure life cycle overlapping generations (OG) model. Both models are very successful in replicating the dispersion of the wealth observed in the U.S. data. According to the quantitative results in both frameworks, the removal of the unfunded social security creates a significantly more equal distribution of wealth in the long run. More specifically, the wealth Gini, a commonly used measure of wealth inequality, falls from 0.807 to 0.521 and 0.765 to 0.684 in the infinite horizon and OG models, respectively. A mechanism, designed to guarantee a certain level of income for the households who fail to save adequately for their retirement years, generates a wealth distribution that is highly concentrated in the top tail. The first model, the infinite horizon model, reports a 39% increase in the fraction of entrepreneurs after privatization while the increase stays very low in the second model, around 4%. Unlike their fraction in the total population, their share in total net worth and income is considerably reduced after the policy change in both models. The stock of physical capital, aggregate output, and aggregate consumption are observed to increase after the privatization. However, the percentage increases in aggregate output and consumption in an economy with entrepreneurs are lower than those observed in an economy without them regardless of the choice of the model. The results also indicate a more unequal distribution of income, even if the share of the richest households is lowered after the removal of the unfunded social security