Pension Systems and the Allocation of Macroeconomic Risk

SFB 649 Discussion Paper No. 2006-066

CentER Discussion Paper No. 2006-101

96 Pages Posted: 26 Oct 2006

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

A. Lans Bovenberg

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 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

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

Suggested Citation

Uhlig, Harald and Bovenberg, A. Lans, Pension Systems and the Allocation of Macroeconomic Risk (October 2006). SFB 649 Discussion Paper No. 2006-066, CentER Discussion Paper No. 2006-101, Available at SSRN: https://ssrn.com/abstract=940405 or http://dx.doi.org/10.2139/ssrn.940405

Harald Uhlig (Contact Author)

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A. Lans Bovenberg

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