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Labor income risk, demographic risk, and the design of (wage-indexed) social security

Christoph Borgmann

No 100, Discussion Papers from Albert-Ludwigs-Universität Freiburg, Institut für Finanzwissenschaft

Abstract: Pay-as-you-go pension programs can help to share risk amongst generations. While a wage-indexed pension program is best suited to share labor income risk, I show that the combination of stochastic labor income and stochastic population growth may reduce the possibilities for intergenerational risk sharing: Labor income risk can only be shared when individuals are also exposed to demographic risk. For demographic uncertainty the usual categorization of pension programs does not suffice. I therefore introduce policies on how the demographic uncertainty is transmitted via social security. An optimal demographic indexation is derived for a small open economy and a closed economy.

Keywords: intergenerational risk sharing; social security; demography (search for similar items in EconPapers)
Date: 2002
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