Demographic Uncertainty and Welfare in a Life-Cycle Model Under Alternative Public Pension Systems

Abstract

In this paper, I analyze consumption, aggregate savings,output and welfare implications of …ve dierent social security arragements whenever there is demographic uncertanity. Following Bohn(2002), I analyze the eect of an uncetain population growth in an extended version of a modi…ed Life-cycle model developed by Gertler(1999). Population growth dampens savings and output under all arrangements. Pay-as-you-go-De…ned Bene…t system appears to fare better than all other alternatives, falling short of the private annuity market with no pension system. But social security in general increases social welfare, with Fully Funded systems faring the best. Thus there appears to be a clear tradeobewteen growth and social welfare. The social security system also reduces the volatility of the economy.