Sharing demographic risk : who is afraid of the baby bust?

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URL:	https://ub-madoc.bib.uni-mannheim.de/2118
URN:	urn:nbn:de:bsz:180-madoc-21187
Document Type:	Working paper
Year of publication:	2008
The title of a journal, publication series:	MEA Discussion Papers
Volume:	166
Place of publication:	Mannheim
Publication language:	English
Institution:	School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series:	Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject:	300 Social sciences, sociology, anthropology
Classification:	JEL: E62 H3 H55 ,
Subject headings (SWD):	Soziale Sicherheit , Demographie , Unsicherheit , Rentenfinanzierung , Finanzpolitik
Keywords (English):	social security , pension design , optimal fiscal policy , demographic uncertainty
Abstract:	We model the optimal reaction of a public PAYG pension system to demographic shocks. We compare the ex-ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules that mimic the pension systems observed in the real world. The model, in particular the pension system, is calibrated to the German economy. The objective of the social planner is calibrated such that the size of the German pension system was optimal under the economic and demographic conditions of the 1960s. We find that the German system comes relatively close to the second-best solution, especially when labor market distortions are correctly modelled. Furthermore, the German system and a constant contribution rate lead to a lower variability of lifetime utility than does the second best policy. The recent baby-boom/baby-bust cycle leads to welfare losses of about 5% of lifetime consumption for some cohorts. We argue that it is crucial for these results to model correctly the labor market distortions arising from the pension system.