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Sharing Demographic Risk--Who Is Afraid of the Baby Bust?

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  • Alexander Ludwig
  • Michael Reiter

Abstract

We model the reaction of a PAYG pension system to demographic shocks. We compare the ex ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules. The model is calibrated to the German economy. We find that the German system comes relatively close to the second-best solution, and that the recent baby-boom/baby-bust cycle leads to welfare losses of about 5 percent of lifetime consumption for some cohorts. We argue that it is crucial for all our results to correctly model the labor market distortions arising from the pension system. (JEL D91, E62, H55, J11)

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  • Alexander Ludwig & Michael Reiter, 2010. "Sharing Demographic Risk--Who Is Afraid of the Baby Bust?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 83-118, November.
  • Handle: RePEc:aea:aejpol:v:2:y:2010:i:4:p:83-118 Note: DOI: 10.1257/pol.2.4.83
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    Cited by:

    1. Sánchez-Romero, Miguel & Sambt, Jože & Prskawetz, Alexia, 2013. "Quantifying the role of alternative pension reforms on the Austrian economy," Labour Economics, Elsevier, vol. 22(C), pages 94-114.
    2. Daniel Harenberg & Alexander Ludwig, "undated". "Social Security and the Interactions Between Aggregate and Idiosyncratic Risk," Working Papers ETH-RC-14-002, ETH Zurich, Chair of Systems Design.
    3. Michael Reiter, 2015. "Solving OLG Models with Asset Choice," 2015 Meeting Papers 1509, Society for Economic Dynamics.
    4. Anna Batyra & David de la Croix & Olivier Pierrard & Henri Sneessens, 2016. "Structural changes in the labor market and the rise of early retirement in Europe," CREA Discussion Paper Series 16-13, Center for Research in Economic Analysis, University of Luxembourg.
    5. Gabay, Daniel & Grasselli, Martino, 2012. "Fair demographic risk sharing in defined contribution pension systems," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 657-669.
    6. Harenberg, Daniel & Ludwig, Alexander, 2014. "Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk," MEA discussion paper series 201413, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    7. Miguel Sánchez-Romero, 2013. "The role of demography on per capita output growth and saving rates," Journal of Population Economics, Springer;European Society for Population Economics, pages 1347-1377.
    8. Daniel Harenberg & Ludwig, Alexander, 2015. "Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security," MEA discussion paper series 201403, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    9. Daniel Harenberg & Alexander Ludwig, 2015. "Social security in an analytically tractable overlapping generations model with aggregate and idiosyncratic risks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 579-603, August.
    10. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, pages 16-27.
    11. Alfonso R. Sánchez, 2014. "The automatic adjustment of pension expenditures in Spain:an evaluation of the 2013 pension reform," Working Papers 1420, Banco de España;Working Papers Homepage.
    12. Metzger, Christoph, 2016. "Intra-household allocation of non-mandatory retirement savings," FZG Discussion Papers 60, University of Freiburg, Research Center for Generational Contracts (FZG).
    13. Mario Lackner & Rudi Stracke & Uwe Sunde & Rudolf Winter-Ebmer, 2015. "Are Competitors Forward Looking in Strategic Interactions? Evidence from the Field," CDL Aging, Health, Labor working papers 2015-09, The Christian Doppler (CD) Laboratory Aging, Health, and the Labor Market, Johannes Kepler University Linz, Austria.
    14. Sanchez-Romero, Miguel & Fürnkranz-Prskawetz, Alexia, 2017. "Redistributive effects of the US pension system among individuals with different life expectancy," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 03/2017, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    15. Knell, Markus, 2013. "The Intergenerational Distribution of Demographic Fluctuations in Unfunded and Funded Pension Systems," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79830, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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