Intergenerational risk sharing by means of pay-as-you-go : an investigation of alternative mechanisms
Working paper
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Date
2006-06Metadata
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- Discussion papers (SAM) [662]
Abstract
A pay-as-you-go (paygo) pension program may provide intergenerational pooling of risks to
individuals’ labor and capital income over the life cycle. By means of illuminating closed form
solutions we demonstrate that the magnitude of the optimal paygo program and the nature of the
underlying risk sharing effects are very sensitive to the chosen combination of risk concepts and
stochastic specification of long run aggregate wage income growth. In an additive way we distinguish
between the pooling of wage and capital risks within periods and two different intertemporal risk
sharing mechanisms. For realistic parameter values, the magnitude of the optimal paygo program is
largest when wage shocks are not permanent and individuals in any generation are considered from a
pre-birth perspective, i.e. a “rawlsian risk sharing” perspective is adopted.
Publisher
Norwegian School of Economics and Business Administration. Department of EconomicsSeries
Discussion paper2006:22