Intergenerational risk shifting through social security and bailout politics

Luca Bossi

Journal of Economic Dynamics and Control, 2008, vol. 32, issue 7, 2240-2268

Abstract: This paper adopts a stochastic overlapping generations framework to analyze the allocation of aggregate financial risks under different social security systems and a majority voting rule. We study whether there will be switches between pay-as-you-go (PAYG) and fully funded (FF) systems in such an economy. We show that in case of a negative aggregate shock, low-income young individuals will form a political coalition with the elderly to implement a PAYG system. PAYG scheme is shown to persist even after a good aggregate shock if the system is redistributive enough.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:32:y:2008:i:7:p:2240-2268

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