Idiosyncratic risk, aggregate risk, and the welfare effects of social security

Arbeitspapier

We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk. We show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components. One reason is the convexity of the welfare gain in total risk. The other reason is a direct risk interaction which amplifies the utility losses from consumption risk. We proceed with a quantitative evaluation of social security's welfare effects. We find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation, even net of the welfare losses from crowding out. About 60% of the welfare gains would be missing when simply summing up the isolated benefits.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEW Discussion Papers ; No. 18-016

Classification and Topics

• Classification: Wirtschaft ; Computable General Equilibrium Models ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications ; Fiscal Policy ; Asset Pricing; Trading Volume; Bond Interest Rates ; Social Security and Public Pensions
• Subject: social security ; idiosyncratic risk ; aggregate risk ; welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Harenberg, Daniel ; Ludwig, Alexander
• Event: Veröffentlichung
• (who): Zentrum für Europäische Wirtschaftsforschung (ZEW)
• (where): Mannheim
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/177286
• URN: urn:nbn:de:bsz:180-madoc-456523
• Last update: 10.03.2025, 11:42 AM CET