Life-cycle earnings, cohort size effects and social security: a quantitative exploration

One of the features of the large overlapping generations model pioneered by Auerbach and Kotlikoff (1987) Dynamic Fiscal Policy is that individuals with different experience levels are perfect substitutes in production. This paper replaces this assumption with a labor market characterized by imperfect substitutability between less and more experienced workers. By comparing the quantitative properties of both cases in a calibrated model for Spain, it is found that in the model economy with imperfect substitution, the effects of aging on the financial viability of the pension system are less severe than in the standard model economy with perfect substitution.