Demographic Uncertainties, Financial Markets and the Social Security System

Abstract:

The paper studies the design of the public pension system using a stochastic OLG model. Old-age income consists of payments of the public pension system plus the returns on private investments. From this perspective the riskiness of financial markets respectively the riskiness of the pay-as-you-go system must be judged from a portfolio perspective, i.e. risks must be measured by the respective beta-risk. It is shown that a stable contribution ratio severely undermines the possible efficiency enhancing effect of a pay-as-you-go-system as it destroys its hedging effect.