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Social Security and Longevity

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  • Torben Andersen
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    Abstract

    Many countries face the problem of how to reform social security systems to cope with increasing life expectancy. This raises questions concerning both distribution and risk sharing across generations. These issues are addressed within an OLG model with stochastic life expectancy across generations and endogenous retirement decisions. The social optimum is shown to imply that retirement age should be proportional to longevity. Moreover, increasing longevity calls for pre-funding even if the utility of all generations is weighted equal to the objective discount rate. The social optimum cannot be decentralized due to a conflict between incentives and risk sharing. The implications of stylized social security systems for risk sharing and retirement incentives are analyzed.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-10/cesifo1_wp1577.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1577.

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    Date of creation: 2005
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    Handle: RePEc:ces:ceswps:_1577

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    1. Talmain, Gabriel, 1998. "An analytical approximate solution to the problem of precautionary savings," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 113-124, September.
    2. Laurence Ball & N Gregory Mankiw, 2001. "Intergenerational Risk Sharing in the Spirit of Arrow Debreu and Rawls with Applications to Social Security Design," Economics Working Paper Archive 478, The Johns Hopkins University,Department of Economics.
    3. Roger H. Gordon & Hal R. Varian, 1985. "Intergenerational Risk Sharing," NBER Working Papers 1730, National Bureau of Economic Research, Inc.
    4. Andersen, Torben M & Dogonowski, Robert R, 2002. "Social Insurance and the Public Budget," Economica, London School of Economics and Political Science, vol. 69(275), pages 415-31, August.
    5. Gabriel Talmain, . "An Analytical Approximate Solution to the Problem of Precautionary Savings," Discussion Papers 98/4, Department of Economics, University of York.
    6. Auerbach, Alan J & Hassett, Kevin A, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-49, Summer.
    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. Auerbach, Alan J. & Hassett, Kevin, 2007. "Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1451-1472, May.
    9. Martin Werding, 2004. "Assessing Old-age Pension Benefits: The Rules Applied In Different Countries," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 2(2), pages 55-63, 07.
    10. Padilla, Emilio, 2002. "Intergenerational equity and sustainability," Ecological Economics, Elsevier, vol. 41(1), pages 69-83, April.
    11. Woodward, Richard T., 1999. "Sustainability As Intergenerational Fairness," Faculty Paper Series 24014, Texas A&M University, Department of Agricultural Economics.
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    Cited by:
    1. Beetsma, Roel M.W.J. & Bovenberg, A. Lans & Romp, Ward E., 2011. "Funded pensions and intergenerational and international risk sharing in general equilibrium," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1516-1534.
    2. Lassila, Jukka & Valkonen, Tarmo, 2007. "Longevity Adjustment of Pension Benefits," Discussion Papers 1073, The Research Institute of the Finnish Economy.
    3. Beetsma, Roel & Bovenberg, A Lans, 2007. "Pension systems, Intergenerational Risk Sharing and Inflation," CEPR Discussion Papers 6089, C.E.P.R. Discussion Papers.
    4. Torben Andersen, 2006. "Increasing Longevity and Social Security Reforms," CESifo Working Paper Series 1789, CESifo Group Munich.

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