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Intergenerational risk sharing by means of pay-as-you-go programs : an investigation of alternative mechanisms

Thøgersen, Øystein
Working paper
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URI
http://hdl.handle.net/11250/162716
Date
2006-06
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  • Discussion papers (SAM) [579]
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 Economics
Series
Discussion paper
2006:22

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