Correspondence: Pierre Pestieau, Université of Liège, 7, bd du Rectorat, B 4000 Liège, Belgium. E-mail: Fabienne.Henry@uclouvain.be

¹received his PhD from Yale and he is now Professor of Economics at the University of Liège. He is also a member of CORE, Louvain-la-Neuve, associate member of PSE, Paris, CEPR fellow and CESIfo fellow. His major interests are pension economics, social insurance, inheritance taxation, redistributive policies and tax competition.

²received his PhD from Yale and he is now Professor of Economics in and Chair of the Department of Economics at Cornell University. His major areas of research include pension economics with special interest in social security, social insurance, taxation policy and wealth distribution.

Received 14 February 2008; Revised 14 February 2008.

Abstract

This paper explores the shift from defined benefit to defined contribution pension plans when the payout rate from social security is set optimally. This paper shows that when employees are receiving more of their private pensions from defined contribution plans one should be raising the payout rate from traditional social security rather than trying to privatise part of it.