Can social security be welfare improving when there is demographic uncertainty?
This paper studies the welfare implications of a PAYG pension system in a neoclassical growth model with overlapping generations, demographic uncertainty and sequentially incomplete markets. In absence of public pensions, small cohorts tend to be favored by the changes in relative prices implied by demographic shocks. As described in Bohn (1999), PAYG Define Benefit systems can help to share the financial risks created by demographic uncertainty across the generations. The overall welfare impact depends on the balance between this insurance effect and the well known crowding-out effect stemming from the unfunded character of the system. Therefore, the question about the total welfare impact of PAYG pensions is intrinsically quantitative. In this paper we use a four-periods OLG model calibrated to the US economy to provide a first quantitative assessment of the relative size of the different effects involved.The findings are unfavorable for PAYG pension systems: the size of the crowding-out effect is large enough to offset the benefits from risk sharing, making the introduction of public pensions a welfare decreasing process (even in ex-ante terms). In particular, with a marginal PAYG pension scheme (providing a 2\% replacement rate of the average wage) small cohorts lose the equivalent to a 1.9% of their consumption in the age interval 20/40, while larger cohorts loss is 1.5%.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005.
"Fertility and Social Security,"
359, Federal Reserve Bank of Minneapolis.
- Michele Boldrin & Maria Cristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," Levine's Bibliography 666156000000000506, UCLA Department of Economics.
- Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," NBER Working Papers 11146, National Bureau of Economic Research, Inc.
- Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
- HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
- Per Krusell & Anthony A. Smith & Jr., 1998.
"Income and Wealth Heterogeneity in the Macroeconomy,"
Journal of Political Economy,
University of Chicago Press, vol. 106(5), pages 867-896, October.
- Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
- Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
- Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May.
- Andrew B. Abel, 2001.
"Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?,"
NBER Working Papers
8131, National Bureau of Economic Research, Inc.
- Andrew B. Abel, 2001. "Will Bequests Attenuate The Predicted Meltdown In Stock Prices When Baby Boomers Retire?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 589-595, November.
- Andrew B. Abel, 2001. "Will bequests attenuate the predicted meltdown in stock prices when baby boomers retire?," Working Papers 01-2, Federal Reserve Bank of Philadelphia.
- Kjetil Storesletten & Chris Telmer & Amir Yaron, 1998.
"The risk sharing implications of alternative social security arrangements,"
GSIA Working Papers
252, Carnegie Mellon University, Tepper School of Business.
- Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999. "The risk-sharing implications of alternative social security arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 213-259, June.
- Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
- Henning Bohn, 2001.
"Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies,"
in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246
National Bureau of Economic Research, Inc.
- Henning Bohn, 1999. "Social Security and Demographic Uncertainty: The Risk Sharing Properties of Alternative Policies," NBER Working Papers 7030, National Bureau of Economic Research, Inc.
- Attanasio, Orazio P & Weber, Guglielmo, 1995.
"Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey,"
Journal of Political Economy,
University of Chicago Press, vol. 103(6), pages 1121-57, December.
- Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
- Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
- Dirk Krueger & Felix Kubler, 2006.
"Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?,"
American Economic Review,
American Economic Association, vol. 96(3), pages 737-755, June.
- Krueger, Dirk & Kubler, Felix, 2005. "Pareto improving social security reform when financial markets are incomplete!?," CFS Working Paper Series 2005/12, Center for Financial Studies (CFS).
- Krueger, Dirk & Kübler, Felix, 2005. "Pareto Improving Social Security Reform when Financial Markets Are Incomplete," CEPR Discussion Papers 5039, C.E.P.R. Discussion Papers.
- Dirk Krueger & Felix Kubler, 2003. "Pareto Improving Social Security Reform when Financial Markets are Incomplete?," NBER Working Papers 9410, National Bureau of Economic Research, Inc.
- Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, .
"Assessing Dynamic Efficiency: Theory and Evidence,"
Rodney L. White Center for Financial Research Working Papers
14-88, Wharton School Rodney L. White Center for Financial Research.
- Luisa Fuster, 1997.
"Is altruism important for understanding the long-run effects of social security?,"
Economics Working Papers
234, Department of Economics and Business, Universitat Pompeu Fabra.
- Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
- Bernard Casey & Howard Oxley & Edward R. Whitehouse & Pablo Antolín & Romain Duval & Willi Leibfritz, 2003. "Policies for an Ageing Society: Recent Measures and Areas for Further Reform," OECD Economics Department Working Papers 369, OECD Publishing.
- Storesletten, Kjetil, 1998.
"Sustaining Fiscal Policy Through Immigration,"
664, Stockholm University, Institute for International Economic Studies.
- Blundell, Richard & Browning, Martin & Meghir, Costas, 1994.
"Consumer Demand and the Life-Cycle Allocation of Household Expenditures,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(1), pages 57-80, January.
- Richard Blundell & Martin Browning & Costas Meghir, 1993. "Consumer demand and the life-cycle allocation of household expenditures," IFS Working Papers W93/11, Institute for Fiscal Studies.
- Kenc, Turalay & Sayan, Serdar, 2001. "Demographic shock transmission from large to small countries: An overlapping generations CGE analysis," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 677-702, August.
- Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April.
- Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Miles, David K & Sefton, James, 2002. "Optimal Social Security Design," CEPR Discussion Papers 3290, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:30:y:2006:i:9-10:p:1615-1646. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.