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Intergenerational Risk Sharing, Stability and Optimality of Alternative Pension Systems

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  • Hassler, John

    ()
    (The Institute for International Economic Studies)

  • Lindbeck, Assar

    ()
    (Th Institute for International Economic Studies and The Research Institute of Industrial Economics)

Abstract

In an analysis of the risk-sharing properties of different types of pension systems, we show that only a fixed-fee pay-as-you go (PAYG) pension systems can provide intergenerational risk sharing for living individuals. Under some circumstances, however, other PAYG pension systems can enhance the expected welfare of all generations by reducing intergenerational income variability. We derive conditions for this to occur. We also analyze the stability of actuarially fair PAYG pension systems. It is shown that if an actuarially fair pension with a non-balanced budget system is dynamically stable, its accumulated surpluses will converge to the same fund as in a fully funded system. We also show that the welfare loss due to labor market distortions will, surprisingly, increase if the implicit marginal return in a compulsory system is raised above the average return.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 493.

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Length: 36 pages
Date of creation: 12 Dec 1997
Date of revision:
Handle: RePEc:hhs:iuiwop:0493

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Keywords: Pension systems; Pay-as-you-go; Intergenerational;

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References

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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. Roger H. Gordon & Hal R. Varian, 1985. "Intergenerational Risk Sharing," NBER Working Papers 1730, National Bureau of Economic Research, Inc.
  3. Martin Feldstein, 1997. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
  4. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  5. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  6. Smith, Alasdair, 1982. "Intergenerational transfers as social insurance," Journal of Public Economics, Elsevier, vol. 19(1), pages 97-106, October.
  7. Blanchard Olivier & Weil Philippe, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(2), pages 1-23, November.
  8. Enders, Walter & Lapan, Harvey E., 1982. "Social Security Taxation and Inter-Generational Risk Sharing," Staff General Research Papers 10822, Iowa State University, Department of Economics.
  9. Zilcha, Itzhak, 1991. "Characterizing efficiency in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 55(1), pages 1-16, October.
  10. 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.
  11. Hassler, John & Lindbeck, Assar, 1997. "Optimal actuarial fairness in pension systems: A note," Economics Letters, Elsevier, vol. 55(2), pages 251-255, August.
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