Pensions systems and the allocation of macroeconomic risk

This paper explores the optimal risk sharing arrangement betweengenerations in an overlapping generations model with endogenous growth.We allow for nonseparable preferences, paying particular attention tothe risk aversion of the old as well as overall “life-cycle” risk aversion.We provide a fairly tractable model, which can serve as a startingpoint to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a generalrisk sharing condition, and discuss its implications. We explore theproperties of the model quantitatively. Among the key findings arethe following. First and for reasonable parameters, the old typicallybear a larger burden of the risk in productivity surprises, if old-agerisk-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.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

MORE ABOUT NETSPAR


Mission en strategy           •           Network           •           Organisation           •          Magazine
Netspar Brief            •            Actionplan 2019-2023           •           Researchagenda

ABOUT NETSPAR

Our partners

vu
B20160708_nationale nederlanden
B20190901_nidi-logo_greyscale
B20160708_apg
B20160708_ministeries
View all partners