Business Cycles and Public Pensions: Aggregate Risk and Social Security in the United States

Shantanu Bagchi (sbagchi@towson.edu)
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Shantanu Bagchi: Department of Economics, Towson University

No 2024-11, Working Papers from Towson University, Department of Economics

Abstract: This paper uses a stylized overlapping-generations model to examine the effect of aggregate (or business cycle) risk on the macroeconomic and welfare implications of Social Security. In this model framework, unfunded public pensions provide partial insurance against inter- and intra-generational risks that are uninsured due to incomplete markets. I find that in this environment, Social Security’s macroeconomic and welfare effects are considerably smaller than those in a framework without aggregate risk, and that the persistence of the aggregate shock process is an important determinant of this difference. I also find that aggregate risk changes how the redistribution implicit in Social Security's benefit-earnings rule interacts with its inter- generational risk sharing mechanism.

Keywords: Social Security; aggregate risk; business cycles; incomplete markets; intergenerational risk. (search for similar items in EconPapers)
JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2024-09, Revised 2024-09
New Economics Papers: this item is included in nep-age, nep-dge and nep-pbe
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