Pension Systems and the Allocation of Macroeconomic Risk

94 Pages Posted: 3 Jan 2007

See all articles by A. Lans Bovenberg

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall 'life-cycle' risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk-aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.

Keywords: Social optimum, pension systems, risk sharing, overlapping generations

JEL Classification: E21, E61, E62, H21, H55, O40

Suggested Citation

Bovenberg, A. Lans and Uhlig, Harald, Pension Systems and the Allocation of Macroeconomic Risk (November 2006). CEPR Discussion Paper No. 5949, Available at SSRN: https://ssrn.com/abstract=954717

A. Lans Bovenberg (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

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Tilburg, 5000 LE
Netherlands
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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