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Pension systems and aggregate shocks

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  • Karsten Jeske
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    Abstract

    The U.S. Social Security Trust Fund faces depletion over the coming decades, and there is a near consensus that social security reform is necessary. Under one suggestion for partial privatization, current surpluses would fund private, individual retirement accounts, and the private savings would make up for future benefit cuts. ; Moving away from social security, however, causes some people to point toward excessive risks associated with private savings. But social security cannot be completely riskless either because its long-term viability depends on such volatile factors as productivity growth, fertility, and immigration, which make social security risky for the same reasons financial assets are. ; To quantify the sensitivity of different retirement schemes to large aggregate shocks, this article provides a model economy in which aggregate shocks affect not only financial market returns but also a pay-as-you-go (PAYGO) pension system. The model depicts a life-cycle economy in which agents work when they are young and their old-age consumption is financed by a combination of a PAYGO pension system and private savings. ; The model simulations show that, in the long run, privatization makes every generation better off, even if a large aggregate shock occurs. The intuition for this result is that under a privatized pension system, savings are higher. This higher savings level increases the capital stock and thus increases welfare enough to insulate all future generations even from large shocks.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

    Volume (Year): (2003)
    Issue (Month): Q1 ()
    Pages: 15-31

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    Handle: RePEc:fip:fedaer:y:2003:i:q1:p:15-31:n:v.88no.1

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    Related research

    Keywords: Pensions ; Saving and investment ; Social security;

    References

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    1. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999. "The risk-sharing implications of alternative social security arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 213-259, June.
    2. Dirk Krueger & Felix Kubler, 2002. "Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete," American Economic Review, American Economic Association, vol. 92(2), pages 407-410, May.
    3. Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," American Economic Review, American Economic Association, vol. 91(4), pages 1116-1125, September.
    4. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
    5. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
    6. Feldstein, Martin & Ranguelova, Elena, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
    7. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
    8. Andrew G. Biggs, 2011. "Social Security," Books, American Enterprise Institute, number 24949, July.
    9. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    10. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
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    Cited by:
    1. Juan C. Conesa & Carlos Garriga, 2005. "Optimal Response to a Demographic Shock," CESifo Working Paper Series 1393, CESifo Group Munich.
    2. Juan Carlos Conesa & Carlos Garriga, 2009. "Optimal response to a transitory demographic shock in Social Security financing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 33-48.

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