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Alternative Risk-Sharing Mechanisms of Social Security

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  • Øystein Thøgersen
  • Kine Bøhlerengen

Abstract

Adopting a portfolio choice approach to pension design, we derive illuminating closed form solutions for optimal pay-as-you-go social security programs. We demonstrate that the nature of the implied risk-sharing effects and their magnitudes are sensitive to the stochastic specification of aggregate wage income growth (i.e. the implicit return on the pay-as-you-go program). Considering individuals in any generation from a "Rawlsian", prebirth perspective, fairly large pay-as-you-go programs in terms of the magnitude of the optimal contribution rate can be rationalized if wage shocks are not permanent.

Suggested Citation

  • Øystein Thøgersen & Kine Bøhlerengen, 2010. "Alternative Risk-Sharing Mechanisms of Social Security," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(2), pages 134-152, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201006)66:2_134:armoss_2.0.tx_2-k
    DOI: 10.1628/001522108X524188
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    References listed on IDEAS

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    1. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 1-19.
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    3. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246, National Bureau of Economic Research, Inc.
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    Cited by:

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    More about this item

    Keywords

    social security; risk-sharing; portfolio choice; persistence in income shocks;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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