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Social Security and Demographic Uncertainty: The Risk Sharing Properties of Alternative Policies

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  • Henning Bohn

Abstract

As the U.S. population ages, the growing retiree-worker ratio increases the burden of public retirement systems. Is it efficient to maintain a defined benefit social security system? Should PAYGO benefits be reduced and private retirement savings be encouraged? The paper examines these questions in a neoclassical growth model with overlapping generations and demographic uncertainty. In case of shocks to the birth rate, I find that a defined-benefits social security system is more efficient ex-ante than a defined-contribution or privatized system. This is because small cohorts generally enjoy favorable wage and interest rate movements. They are in the labor force when the capital- labor ratio is high and they earn capital income when the capital-labor ratio is low. A defined benefit system helps to offset the effect of these factor price movements by imposing higher taxes on small cohorts. Neither defined-benefits nor its main alternative are fully efficient, however, because they all fail to adjust current retiree benefits in response to anticipated future demographic changes. In case of changes in life-expectancy, the efficient policy response depends on the predictability of deaths at the individual level and on the availability of annuities. Reduced benefits can be efficient if annuities markets are missing and the mortality change is such that accidental bequests decline, but not otherwise.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7030.

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Date of creation: Mar 1999
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Publication status: published as Henning Bohn. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," in John Y. Campbell and Martin Feldstein, editors, "Risk Aspects of Investment-Based Social Security Reform" University of Chicago Press (2001)
Handle: RePEc:nbr:nberwo:7030

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  1. Andrew B. Abel, 1999. "The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation," NBER Working Papers 6991, National Bureau of Economic Research, Inc.
  2. David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990. "An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
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  9. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
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  11. Smith, Alasdair, 1982. "Intergenerational transfers as social insurance," Journal of Public Economics, Elsevier, vol. 19(1), pages 97-106, October.
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  14. Macunovich, Diane J, 1998. "Relative Cohort Size and Inequality in the United States," American Economic Review, American Economic Association, vol. 88(2), pages 259-64, May.
  15. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
  16. Welch, Finis, 1979. "Effects of Cohort Size on Earnings: The Baby Boom Babies' Financial Bust," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S65-97, October.
  17. Henning Bohn, 1997. "Social Security reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 41(Jun), pages 193-227.
  18. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
  19. repec:fth:calaec:3-98 is not listed on IDEAS
  20. Henning Bohn, 1999. "Should the Social Security Trust Fund Hold Equities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 666-697, July.
  21. John McHale, 2001. "The Risk of Social Security Benefit-Rule Changes: Some International Evidence," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 247-290 National Bureau of Economic Research, Inc.
  22. Finis Welch, 1979. "Effects of Cohort Size on Earnings: The Baby Boom Babies' Financial Bust," UCLA Economics Working Papers 146, UCLA Department of Economics.
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  24. Bohn, Henning, 1999. "Will social security and Medicare remain viable as the U.S. population is aging?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 1-53, June.
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