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Pension systems and aggregate shocks

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  • Karsten Jeske

Abstract

The U.S. Social Security Trust Fund faces depletion over the coming decades, and there is a near consensus that social security reform is necessary. Under one suggestion for partial privatization, current surpluses would fund private, individual retirement accounts, and the private savings would make up for future benefit cuts. ; Moving away from social security, however, causes some people to point toward excessive risks associated with private savings. But social security cannot be completely riskless either because its long-term viability depends on such volatile factors as productivity growth, fertility, and immigration, which make social security risky for the same reasons financial assets are. ; To quantify the sensitivity of different retirement schemes to large aggregate shocks, this article provides a model economy in which aggregate shocks affect not only financial market returns but also a pay-as-you-go (PAYGO) pension system. The model depicts a life-cycle economy in which agents work when they are young and their old-age consumption is financed by a combination of a PAYGO pension system and private savings. ; The model simulations show that, in the long run, privatization makes every generation better off, even if a large aggregate shock occurs. The intuition for this result is that under a privatized pension system, savings are higher. This higher savings level increases the capital stock and thus increases welfare enough to insulate all future generations even from large shocks.

Suggested Citation

  • Karsten Jeske, 2003. "Pension systems and aggregate shocks," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 15-31.
  • Handle: RePEc:fip:fedaer:y:2003:i:q1:p:15-31:n:v.88no.1
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    6. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
    7. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
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    Cited by:

    1. Juan Carlos Conesa & Carlos Garriga, 2004. "Optimal Response to a Demographic Shock," Working Papers 157, Barcelona Graduate School of Economics.
    2. Juan Carlos Conesa & Carlos Garriga, 2009. "Optimal response to a transitory demographic shock in Social Security financing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 33-48.

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