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Political Risk of Social Security: The Case of the Indexation of Benefits in the Czech Republic

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  • Libor Dusek

Abstract

We contribute to the literature on the political risk of social security by extending Feldstein and Ranguelova's (2001) methodology for measuring risk in a funded pension system to a pay-as-you-go system. We use the methodology to assess the risk over indexation of benefits in the Czech Republic during the 1990's and early 2000's. The government's discretion over indexations creates both aggregate and individual risk and makes the Czech Republic a particulary interesting case to study. Using data on the actual evolution of benefits for people who retired between 1988 and 1995, we find that retirees faced fairly large volatility in the changes in real benefits - while the mean percentage change was 1.2, its standard deviation was 4.3. This volatility reduces the expected utility of retirees by 0.8 to 1.3 percent of equivalent consumption.

Suggested Citation

  • Libor Dusek, 2007. "Political Risk of Social Security: The Case of the Indexation of Benefits in the Czech Republic," CERGE-EI Working Papers wp318, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp318
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    References listed on IDEAS

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    Cited by:

    1. Jaeger Nelson, 2020. "Welfare Implications of Uncertain Social Security Reform," Public Finance Review, , vol. 48(4), pages 425-466, July.

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    More about this item

    Keywords

    Social security; political risk; pension reform.;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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