Individual account and the life-cycle approach to social insurance

We explore the rationales for financing part of social insurance via mandatory individual accounts. An account system that offers liquidity insurance and a lifetime income guarantee helps to alleviate the dilemma between insurance and incentives. To illustrate this, we analyse a specific proposal for reform of the Danish system of social insurance, involving the use of individual accounts. We estimate how the reform would affect the distribution oflifetime incomes, the public budget, and economic efficiency. Our analysis suggests that, even with conservative assumptions regarding labour supply elasticities, the proposed reform would generate a Pareto improvement and would imply only a minor increase in the inequality of lifetime income distribution.