WELFARE EFFECTS OF UNFUNDED PENSION SYSTEMS WHEN LABOR SUPPLY IS ENDOGENOUS

A mandatory unfunded pension system can lead to welfare losses if the contributions are levied in such a way that the labor supply decision of the individuals is distorted. This is shown in an overlapping-generations model for a closed economy. Furthermore, it is shown that under certain conditions a gradual abolition of unfunded pensions - using lump-sum contributions in the transition phase - can lead to an intergenerational Pareto improvement. Thus the paper extends a result recently derived by Homburg for a small open economy to the closed economy case.