representative agent assumption. The first is that one of the main concerns, both inside and outside academia, is that this kind of reform may have negative effects on income distribution. (See for example, Diamond [1977] or The Economist [1996]). The reason for this concern is simple: in many countries, PAYG social security systems include strong redistributional features in their design. For example, in the United States this is one of the main reasons why authorities do not seriously consider the option of reforming the system<sup>3</sup> , even though this one is facing severe financial conslraints because of its PAYG nature. In fact, in most countries the original idea of introducing a social security system arises from a mainly distributional concern: to protect the poor old. Therefore, one way in which the agents in our model may differ is on their income levels. Specifically, they differ in their endowments of human capital.

The second issue arises from the fact that there is evidence that, at least in some developing countries, some poor people have demand for savings but they do nolt have access to the financial system because their wealth is low (for example banks often require minimum deposits to open an account or some towns do not even have financial institutions.) But still their demand for savings may be a high percentage of their income. If the fraction of the population with these characteristics is high, introclucing these people to the capital accumulation process may have important effects in the aggregate.

In the case of Mexico, some poor people do not have the option of channeling their savings through the formal financial system because many institutions require large initial deposits to open accounts. Also, there are substantial penalties for maintaining low balances, sometimes resulting in negative real interest rates. Or, in some rural areas, banks or other financial institutions are nonexistent. But as we already mentioned and as economic theory indicates, having low income does not necessarily mean having low savings. As we know, saving means exchanging consumption in the present for consumption in the future and many of the reasons why people save apply for poor people the same as for rich people i.e. deriving more utility for future consumption, precautionary savings, bequest motives, etc. The result is that many agents who want to save part of their current income have to use informal ways to channel their savings. Manseil-Carstens [1995] shows plenty of evidence of this phenomenon for the Mexican case. She cites cases where workers ask their supervisors to retain part of their salaries as a way of safely maintaining their savings - the places where they live are not always safe to store cash. Another important way in which poor people save is through lending money to relatives and friends at low but positive interest rates. In a survey realized by Mansell-Carstens with poor domestic workers, 56 percent of them revealed making a loan in the previous six months to relatives or friends. Also, some workers decide to save by buying consumer durables such as jewelry and electrical appliances. In the case of poor peasants, Mansell-Carstens reports that a common savings method is that of acquiring chicken and goats; some reported that these animals are superior as saving instruments than others such as cows and horses because they are more liquid: "you cannot sell one part of a cow when you need a little money" stated one of her informants. Our thesis is that many poor workers will obtain access to the formal financial system through the privatized social security system. And this idea is supported by the evidence: Mansell-Carstens reports that many

> 3 Several studies,[Burkhauser and Warlick, 1981; Ferrara and Lott, 1985; Boskin et. al., 1986; Rofman, 1993; Wolf, 1987] conclude that the United States social security system presents a clear progressive income redistribution.

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