Social Security and Demographic Uncertainty

Henning Bohn

in Risk Aspects of Investment-Based Social Security Reform

Published by University of Chicago Press

Published in print December 2000 | ISBN: 9780226092553
Published online February 2013 | e-ISBN: 9780226092560 | DOI:
Social Security and Demographic Uncertainty

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Using the overlapping-generations model, this chapter examines a different type of risk: the demographic risk that a generation will be unexpectedly large or small. In a closed economy, a large generation tends to drive down the marginal product of labor and therefore receives relatively low wages; conversely, a small generation tends to receive high wages. The chapter argues that a defined-benefit pay-as-you-go system helps generations share this risk more efficiently than defined-contribution or privatized systems. The chapter also considers other types of demographic shocks, including anticipated future demographic changes and shocks to the life expectancy of an existing generation. In addition, it considers the ramifications of missing annuities and accidental bequests, argues that efficient risk sharing often requires the adjustment of current social security benefits in response to news about future demographic trends, and discusses the effect of elastic labor supply on demographics.

Keywords: overlapping-generations model; social security; demographics; demographic risk; pay-as-you-go system; demographic shocks; life expectancy; missing annuities; accidental bequests; risk sharing

Chapter.  16853 words.  Illustrated.

Subjects: Economic Systems

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