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Business Cycles and Public Pensions: Aggregate Risk and Social Security in the United States

Author

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  • Shantanu Bagchi

    (Department of Economics, Towson University)

Abstract

This paper uses a stylized overlapping-generations model to examine the effect of aggregate (or business cycle) risk on the macroeconomic and welfare implications of Social Security. In this model framework, unfunded public pensions provide partial insurance against inter- and intra-generational risks that are uninsured due to incomplete markets. I find that in this environment, Social Security’s macroeconomic and welfare effects are considerably smaller than those in a framework without aggregate risk, and that the persistence of the aggregate shock process is an important determinant of this difference. I also find that aggregate risk changes how the redistribution implicit in Social Security's benefit-earnings rule interacts with its inter- generational risk sharing mechanism.

Suggested Citation

  • Shantanu Bagchi, 2024. "Business Cycles and Public Pensions: Aggregate Risk and Social Security in the United States," Working Papers 2024-11, Towson University, Department of Economics, revised Sep 2024.
    • Handle: RePEc:tow:wpaper:2024-11
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    File URL: http://webapps.towson.edu/cbe/economics/workingpapers/2024-11.pdf
    File Function: First version, 2024
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    More about this item

    Keywords

    Social Security; aggregate risk; business cycles; incomplete markets; intergenerational risk.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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