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Political Risk of Social Security: The Case of the Indexation of Benefits in the Czech Republic

Libor Dusek

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We contribute to the literature on the political risk of social security by extending Feldstein and Ranguelova's (2001) methodology for measuring risk in a funded pension system to a pay-as-you-go system. We use the methodology to assess the risk over indexation of benefits in the Czech Republic during the 1990's and early 2000's. The government's discretion over indexations creates both aggregate and individual risk and makes the Czech Republic a particulary interesting case to study. Using data on the actual evolution of benefits for people who retired between 1988 and 1995, we find that retirees faced fairly large volatility in the changes in real benefits - while the mean percentage change was 1.2, its standard deviation was 4.3. This volatility reduces the expected utility of retirees by 0.8 to 1.3 percent of equivalent consumption.

Keywords: Social security; political risk; pension reform. (search for similar items in EconPapers)
JEL-codes: D72 H55 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-tra
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Citations: View citations in EconPapers (1)

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