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Demographic Uncertainty and Welfare in a Life-Cycle Model Under Alternative Public Pension Systems

48 Pages Posted: 21 Sep 2008  

Muhammad Rahman

Indiana University

Date Written: September 8, 2008

Abstract

In this paper, I analyze consumption, aggregate savings, output and welfare implications of five different social security arrangements whenever there is demographic uncertainty. Following Bohn (2002), I analyze the effect of an uncertain population growth in an extended version of a modified Life-cycle model developed by Gertler (1999). Population growth dampens savings and output under all arrangements. Pay-as-you-go-Defined Benefit system appears to fare better than all other alternatives, falling short of the private annuity market with no pension system. But social security in general increases social welfare, with Fully Funded systems faring the best. Thus there appears to be a clear trade-off between growth and social welfare. The social security system also reduces the volatility of the economy.

Keywords: Demographic uncertainty, Social welfare, Life-cycle model, Annuity market, Pay-as-you-go, Fully funded, Defined benefit, Defined contribution

Suggested Citation

Rahman, Muhammad, Demographic Uncertainty and Welfare in a Life-Cycle Model Under Alternative Public Pension Systems (September 8, 2008). CAEPR Working Paper No. 2008-024. Available at SSRN: https://ssrn.com/abstract=1270643 or http://dx.doi.org/10.2139/ssrn.1270643

Muhammad Rahman (Contact Author)

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

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