Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177286
Authors: 
Harenberg, Daniel
Ludwig, Alexander
Year of Publication: 
2018
Series/Report no.: 
ZEW Discussion Papers 18-016
Abstract: 
We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk. We show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components. One reason is the convexity of the welfare gain in total risk. The other reason is a direct risk interaction which amplifies the utility losses from consumption risk. We proceed with a quantitative evaluation of social security's welfare effects. We find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation, even net of the welfare losses from crowding out. About 60% of the welfare gains would be missing when simply summing up the isolated benefits.
Subjects: 
social security
idiosyncratic risk
aggregate risk
welfare
JEL: 
C68
E27
E62
G12
H55
Document Type: 
Working Paper
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