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The risk sharing effects of social security and the stochastic properties of income growth

Thøgersen, Øystein
Working paper
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URI
http://hdl.handle.net/11250/162856
Date
2003-05
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  • Discussion papers (SAM) [640]
Abstract
Time-series analyses suggest that income shocks are fairly persistent. This has implications

for the intergenerational risk-sharing effects of pay-as-you- go (paygo) social security

programs. By means of a simple stochastic specification, we derive theoretically how the

variance of individuals’ lifetime income depends on the degree of persistence in the income

shocks and the magnitude of the paygo program. A low or medium degree of persistence

ensures that properly scaled paygo programs provide intergenerational diversification of

income risk. On the other hand, a somewhat higher degree of persistence may well imply that

paygo programs in fact increase the exposure to income shocks. Taking into account that it is

hard to reject that income shocks are permanent (and income follows a random walk) in many

countries, we can not exclude that many individuals in the OECD area do face a heightened

exposure to income risk as a consequence of the actual social security programs financed on a paygo basis.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2003:7

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