REFORM OF THE SOCIAL-SECURITY PENSION SYSTEM, INCENTIVES, AND GENERATION CONFLICTS

Using an intertemporal simulation model, this paper considers some dis tributional, allocative and macroeconomic effects of reforming old-age social security in Denmark. The major elements of our reform proposal are (a) a separation of the old-age social security budget from the t otal government budget; (b) a partial and preannounced conversion from >>pay-as-you-go<< financing to a fund-based system and (c) removal of a number of distortions in the Danish social security system. We find that whereas some generations will be adversely affected during the t ransition period, the welfare effects are positive in the long run; th e supply of labour increases and, finally, the proposal leads to a dec rease in the stock of outstanding external debt.