Social Security, Demographics, and Risk

Abstract

Studies social security under uncertainty, focusing on the influence of demographics on systems of old-age provision. Summarizes the most fundamental results on the issue of pay-as-you-go social security. Surveys the literature on issues of demographic transition, pensions, and pension reform. Uses a very simple example to demonstrate how intergenerational risk sharing via social security can serve as a substitute for the missing market of intertemporal insurance contracts. Examines the risk components of old-age provision from a macroeconomic perspective, classifying risk into three categories: demographic risks, productivity and valuation risks, and political risks. Addresses the optimal design of pay-as-you-go social security in the presence of labor income risks and demographic risks and, in particular, considers optimal demographic indexation of social security. Examines how the generosity of the benefit rule of the German public pension system has changed during the past three decades, calculates the political riskiness of the German public pension scheme, and estimates how demographic developments have triggered changes to the benefit formula. Explores issues of social security and risk diversification in relation to portfolio choice and financial markets, discussing social security as a "quasi-asset" in the basket of an individual's wealth; a portfolio approach to designing social security; international diversification as a possible way of spreading risks; annuities as instruments in old-age provision; and how new, currently nonexistent capital markets and financial products could help in managing risk more efficiently. No index.