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Pension Sytems and the Allocation of Macroeconomic Risk

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  • Lans Bovenberg
  • Harald Uhlig

Abstract

This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall ``life-cycle´´ risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-066.

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Length: 96 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-066

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Keywords: Social optimum; pension systems; risk sharing; overlapping generations;

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References

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Cited by:
  1. Beetsma, Roel & Bovenberg, A Lans, 2007. "Pension systems, Intergenerational Risk Sharing and Inflation," CEPR Discussion Papers 6089, C.E.P.R. Discussion Papers.
  2. Du Cai Cai & Muysken Joan & Sleijpen Olaf, 2010. "Economy wide risk diversification in a three-pillar pension system," Research Memoranda 055, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.

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