Capital-skill complementarity and the redistributive effects of Social Security Reform

This paper analyses the general equilibrium implications of reforming pay-as-you-go pension systems in an economy with heterogeneous agents, human capital investment and capital-skill complementarity. It shows that increasing funding, by raising savings, delivers in the long run higher physical and human capital and therefore higher output, but also higher across-group wage and income inequality. It also shows that the general equilibrium effects induced by this reform affect groups' sizes in a way that the higher across-group inequality generated by more funding goes with a larger share of the population against redistribution.