A note on intergenerational risk sharing and the design of pay-as-you-go pension programs

Thøgersen, Øystein

doi:10.1007/s001480050074

Cited by 39 publications

(26 citation statements)

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“…Obviously, this paper is also related to studies of how a paygo program may contribute to intergenerational sharing of income-risk; see for example Gordon and Varian (1988), Lapan (1982, 1993), Thøgersen (1998) and Wagener (2001aWagener ( , 2001b.…”

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confidence: 99%

Designing social security – a portfolio choice approach

Matsen

Thøgersen

2004

European Economic Review

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Public social security systems may provide diversification of risks to individuals' life-time income. Capturing that a pay-as-you-go program (paygo) may be considered as a "quasiasset", we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach.A low-yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources. Moreover, a funded part of the social security system can be justified by potential imperfections to the individuals' free access to the stock market. Numerical calculations for Sweden, Norway, the US and the UK demonstrate that the optimal size of paygo-part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth. Our calculations suggest that a paygo program has an important role in the three former countries -but not in the U.K. JEL Classification: H55, D91, G11

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mentioning

confidence: 99%

Designing social security – a portfolio choice approach

Matsen

Thøgersen

2004

European Economic Review

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“…Utilizing overlapping generations models with somewhat different features, they demonstrate that paygo programs might provide welfare gains as a consequence of intergenerational income risk sharing corresponding to a pooling of t λ with 1 + t λ in the above framework. Thøgersen (1998) builds closely on Gordon and Varian's analysis and shows how the risk sharing properties of the paygo program in the case of rawlsian risk sharing depends crucially on whether it is a DC or a DB program.…”

Section: Intergenerational Income Risk Sharingmentioning

confidence: 98%

Social Security and Future Generations

Thøgersen¹,

Fehr

2009

Handbook of Research on Cost–Benefit Analysis

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We survey the effects of social security in the form of mandatory public pension programs on the intergenerational distribution of tax burdens, income, various risks and welfare. The first part considers basic theoretical concepts and highlight how the intergenerational effects of social security hinge on three types of major mechanisms: i) Defined benefit vs. defined contribution, ii) pay-as-yougo financing vs. funding and iii) the strength of the tax-benefit link of the program. The second part of the survey considers advances in the large literature that offer quantitative assessments of social security programs and reform proposals by means of numerical overlapping generations models. In both parts of the survey we distinguish between deterministic models and models that incorporate various stochastic elements †

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“…Finally, intergenerational risk sharing can be an objective for the public pension system. Here, the Return-Rate Formula provides insurance against income risk (see Thøgersen (1998)) but not against changes in fertility. If, however, fertility is seen not as an aggregate risk, but rather as a choice variable, this effect may even be judged as desirable.…”

Section: Comparing the Formulasmentioning

confidence: 99%

The German Retirement Benefit Formula: Drawbacks and Alternatives

Breyer¹,

Kifmann²

2004

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Preliminary version, comments are invited. Terms of use: Documents in AbstractIn this paper we identify a number of objectionable features of the German retirement benefit formula. We show that groups of insureds with higher than average life expectancy, in particular high-income groups, are subsidized by the rest of the membership because the formula neglects differences in group-specific life expectancy. Furthermore, the current formula leads to undesirable long-run effects if the earnings ceilings is raised, mandatory membership is extended, life expectancy rises or the rate of population growth declines. We present two alternative formulas which take group-specific life expectancy into account. In particular, a return-rate formula which rewards each Euro of contributions with the internal rate of return of the pay-as-you-go pension system proves to be superior to the current formula.JEL-classification: H55, H22, J18.

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A note on intergenerational risk sharing and the design of pay-as-you-go pension programs

Cited by 39 publications

References 4 publications

Designing social security – a portfolio choice approach

Designing social security – a portfolio choice approach

Social Security and Future Generations

The German Retirement Benefit Formula: Drawbacks and Alternatives

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