Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 493: Intergenerational Risk Sharing, Stability and Optimality of Alternative Pension Systems

John Hassler () and Assar Lindbeck ()
Additional contact information
John Hassler: The Institute for International Economic Studies, Postal: S-106 91 Stockholm, Sweden
Assar Lindbeck: Th Institute for International Economic Studies and The Research Institute of Industrial Economics, Postal: S-106 91 Stockholm, Sweden, Box 5501, S-114 85 Stockholm, Sweden

Abstract: In an analysis of the risk-sharing properties of different types of pension systems, we show that only a fixed-fee pay-as-you go (PAYG) pension systems can provide intergenerational risk sharing for living individuals. Under some circumstances, however, other PAYG pension systems can enhance the expected welfare of all generations by reducing intergenerational income variability. We derive conditions for this to occur. We also analyze the stability of actuarially fair PAYG pension systems. It is shown that if an actuarially fair pension with a non-balanced budget system is dynamically stable, its accumulated surpluses will converge to the same fund as in a fully funded system. We also show that the welfare loss due to labor market distortions will, surprisingly, increase if the implicit marginal return in a compulsory system is raised above the average return.

Keywords: Pension systems; Pay-as-you-go; Intergenerational

JEL-codes: H50; H55; H60

36 pages, December 12, 1997

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