Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/26467 
Year of Publication: 
2008
Series/Report no.: 
CESifo Working Paper No. 2422
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We model the optimal reaction of a public 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 that mimic the pension systems observed in the real world. The model, in particular the pension system, is calibrated to the German economy. The objective of the social planner is calibrated such that the size of the German pension system was optimal under the economic and demographic conditions of the 1960s. We find that the German system comes relatively close to the second-best solution, especially when labor market distortions are correctly modelled. Furthermore, the German system and a constant contribution rate lead to a lower variability of lifetime utility than does the second best policy. The recent baby-boom/baby-bust cycle leads to welfare losses of about 5% of lifetime consumption for some cohorts. We argue that it is crucial for these results to model correctly the labor market distortions arising from the pension system.
Subjects: 
Social security
pension design
optimal fiscal policy
demographic uncertainty
JEL: 
E62
H3
H55
Document Type: 
Working Paper
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