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Social Security and Macroeconomic Risk in General Equilibrium

  • Peter Broer

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This paper studies the interaction between macro-economic risk and paygo social security. For this, it uses an applied general equilibrium model with overlapping generations of risk-averse households. The sources of risk are productivity shocks and depreciation shocks. The risk profile of pensions differs from that of financial assets because pensions are linked partially to future wage rates and productivity. The model is used to discuss the effects of changes in the social security system on labor supply, private saving, and welfare in a closed economy.�The author finds that switching from Defined Benefit to Defined Contribution is generally welfare improving, if current generations are compensated, while a switch from a wage-indexed Defined Benefit system to a price-indexed system is generally welfare deteriorating. A reduction in the size of the pay-as-you-go system does not yield clear results: if current generations are compensated, some future generations lose, and others gain.

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File URL: http://www.cpb.nl/sites/default/files/publicaties/download/cpb-discussion-paper-221-social-security-and-macroeconomic-risk-general-equilibrium.pdf
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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 221.

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Date of creation: Oct 2012
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Handle: RePEc:cpb:discus:221
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  1. Breyer, Friedrich & Straub, Martin, 1993. "Welfare effects of unfunded pension systems when labor supply is endogenous," Journal of Public Economics, Elsevier, vol. 50(1), pages 77-91, January.
  2. Robin Brooks, 2000. "What Will Happen To Financial Markets When The Baby Boomers Retire?," Computing in Economics and Finance 2000 92, Society for Computational Economics.
  3. 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.
  4. Robin Brooks, 2000. "What Will Happen to Financial Markets When the Baby Boomers Retire?," IMF Working Papers 00/18, International Monetary Fund.
  5. Matsen, Egil & Thogersen, Oystein, 2004. "Designing social security - a portfolio choice approach," European Economic Review, Elsevier, vol. 48(4), pages 883-904, August.
  6. 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.
  7. Virginia Sanchez-Marcos & Alfonso Sanchez Martin, 2004. "Can Social Security be welfare improving when there is demographic uncertainty?," Computing in Economics and Finance 2004 163, Society for Computational Economics.
  8. 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.
  9. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series 580, Research Institute of Industrial Economics.
  10. Homburg, Stefan, 1990. "The Efficiency of Unfunded Pension Schemes," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 640-647.
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