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The Welfare Gains of Improving Risk Sharing in Social Security

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  • Olovsson, Conny

    ()
    (Institute for International Economic Studies, Stockholm University)

Abstract

This paper shows that improved intergenerational risk sharing in social security may imply very large welfare gains, amounting to up to 15 percent of the per-period consumption relative to the current U.S. consumption. Improved risk sharing raises welfare through a direct effect, i.e., by correcting an initially inefficient allocation of risk, and through a general equilibrium (GE) effect. The GE effect is due to the fact that the allocation of risk in the pay-as-you-go system influences the demand for capital. As a result, with an efficient risk sharing arrangement, the crowding out effect associated with an unfunded system can actually be completely eliminated. Efficient risk sharing in social security implies highly volatile and pro-cyclical benefits, i.e., that retirees' exposure to productivity risk is increased. Consequently, a policy involving completely safe benefits will unambiguously be welfare reducing.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 728.

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Length: 29 pages
Date of creation: 10 Mar 2004
Date of revision:
Handle: RePEc:hhs:iiessp:0728

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Social security; Risk sharing;

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Citations

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Cited by:
  1. Gottardi, Piero & Kubler, Felix, 2011. "Social security and risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1078-1106, May.
  2. Lans Bovenberg & Harald Uhlig, 2006. "Pension Sytems and the Allocation of Macroeconomic Risk," SFB 649 Discussion Papers SFB649DP2006-066, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Marcello D’Amato & Vincenzo Galasso, 2008. "Political Intergenerational Risk Sharing," Working Papers 342, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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