The Economics of Pensions

Nicholas Barr

in The Welfare State as Piggy Bank

Published in print May 2001 | ISBN: 9780199246595
Published online November 2003 | e-ISBN: 9780191595936 | DOI:
 The Economics of Pensions

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In the world of certainty described in Ch. 2, people provide for their old age through saving, and those voluntary choices are efficient. Once the analysis is extended to allow for risk, uncertainty, and imperfect information, pensions based on voluntary saving are no longer necessarily efficient, opening up the possibility that state intervention might improve well‐being. This chapter sets out the simple economics of pensions and then discusses problems of risk, uncertainty, and imperfect information. Consumers are imperfectly informed about complex, long‐run contracts, necessitating stringent regulation of financial markets. Insurers are badly informed in a variety of ways, suggesting that social insurance might have a role. Consumers, insurers, and government all face uncertainty through demographic shocks and macroeconomic turbulence. Such shocks suggest a role for the state in addressing inflation and a potential role for consumption smoothing across generations.

Keywords: demographic shocks; economics of pensions; imperfect information; macroeconomic shocks; pensions; regulation; risk; saving; social insurance; uncertainty

Chapter.  2805 words. 

Subjects: Public Economics

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