Private versus public risk sharing: Should governments provide reinsurance

The paper examines alternative arrangements for intergenerational risk sharing in a small open economy subject to macroeconomic disturbances. Under certain conditions, private pension funds can provide substantial risk sharing across generations. Private risksharing alleviates the burden on governments to provide insurance, but it is limited by mobility in the labor market and by the ability of corporate plan sponsors to default.Government has a role in correcting these limitations by providing reinsurance and it can enter insurance arrangements on behalf of future generations. Optimal reinsurance includes bonds indexed to longevity and to productivity.