 Aggregate Risk, Political Constraints and Social Security DesignVincenzo Galasso and Marcello D'Amato No 3330, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: In a stochastic environment, with political constraints, we analyse the behavior of a fully funded system, whose portfolio is composed of a risk free and a risky asset. When an aggregate negative shock hits, a large share of the wealth of the elderly is wiped out and office-seeking policy-makers ?bail them out,? by instituting a long-lasting PAYG system. Under these political constraints, a fully funded system suffers from a moral hazard problem, since agents have an incentive to choose a riskier portfolio, which increases the wealth loss associated with the bad state. The introduction of a mixed system reduces the riskiness of the portfolio, which remains however higher than in the case of no policy-maker?s intervention. Furthermore, the early adoption of a mixed system, previous to the occurrence of a negative shock, eliminates the policy-maker?s incentive to intervene, albeit at a high cost. In fact, its unfunded pillar would be larger than the PAYG system introduced in the case of a bad shock. In our dynamically efficient economy, this would amount to impose an extra loss on all future generations. Keywords: Fully funded; Political bailout; Moral hazard (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3330 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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