Faculty of Economics and Business Administration Publications Database

Sharing Demographic Risk--Who Is Afraid of the Baby Bust?

Reiter, Michael
Volume: 2
Number: 4
Pages: 83 - 118
Month: November
ISSN-Print: 1945-7731
Link External Source: Online Version
Year: 2010

We model the reaction of a PAYG pension system to demographic shocks. We compare the ex ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules. The model is calibrated to the German economy. We find that the German system comes relatively close to the second-best solution, and that the recent baby-boom/baby-bust cycle leads to welfare losses of about 5 percent of lifetime consumption for some cohorts. We argue that it is crucial for all our results to correctly model the labor market distortions arising from the pension system.