Social security and macroeconomic risk in general equilibrium

This paper studies the interaction between macro-economic risk and paygo social security. For this, it uses an applied general equilibrium model with overlapping generations of risk-aversehouseholds. The sources of risk are productivity shocks and depreciation shocks. The risk profile of pensions differs from that of financial assets, because pensions are linked partially tofuture wage rates and productivity. The model is used to discuss the effects of changes in the social security system on labor supply, private saving, and welfare in a closed economy.I find that switching from Defined Benefit to Defined Contribution is generally welfareimproving, if current generations are compensated, while a switch from a wage-indexed Defined Benefit system to a price-indexed system is generally welfare-deteriorating. A reductionin the size of the PAYG system does not yield clear results: if current generations are compensated, some future generations lose, and others gain.

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.

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