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Optimal Pension Policy in a Life-Cycle Economy with Demographic Uncertainty

Author

Listed:
  • Alexander Ludwig

    (MEA, Universität Mannheim)

  • Michael Reiter

    (Universitat Pompeu Fabra, Barcelona)

Abstract

We present an optimal (Ramsey) social security policy analysis in the presence of demographic uncertainties and incomplete markets. According to our findings, a social security system is an efficient instrument for intergenerational risk-sharing. When compared with government debt, a pay-as-you-go (PAYG) financed pension system comes closer to the complete markets solution. We further compute impulse response functions to analyze the reactions of purely private markets and the government to exogenous shocks. The higher the impatience of the government relative to the private agents, the more sizeable is the PAYG pension system and the more are the positive impacts of shocks shifted to today’s generations

Suggested Citation

  • Alexander Ludwig & Michael Reiter, 2006. "Optimal Pension Policy in a Life-Cycle Economy with Demographic Uncertainty," Computing in Economics and Finance 2006 116, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:116
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