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Risk Aspects of Investment-Based Social Security Reform$
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John Y. Campbell and Martin Feldstein

Print publication date: 2000

Print ISBN-13: 9780226092553

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092560.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Social Security and Demographic Uncertainty

Social Security and Demographic Uncertainty

The Risk-Sharing Properties of Alternative Policies

(p.203) 6 Social Security and Demographic Uncertainty
Risk Aspects of Investment-Based Social Security Reform

Henning Bohn

University of Chicago Press

Using the overlapping-generations model, this chapter examines a different type of risk: the demographic risk that a generation will be unexpectedly large or small. In a closed economy, a large generation tends to drive down the marginal product of labor and therefore receives relatively low wages; conversely, a small generation tends to receive high wages. The chapter argues that a defined-benefit pay-as-you-go system helps generations share this risk more efficiently than defined-contribution or privatized systems. The chapter also considers other types of demographic shocks, including anticipated future demographic changes and shocks to the life expectancy of an existing generation. In addition, it considers the ramifications of missing annuities and accidental bequests, argues that efficient risk sharing often requires the adjustment of current social security benefits in response to news about future demographic trends, and discusses the effect of elastic labor supply on demographics.

Keywords:   overlapping-generations model, social security, demographics, demographic risk, pay-as-you-go system, demographic shocks, life expectancy, missing annuities, accidental bequests, risk sharing

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