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American Economic Journal: Economic Policy: Vol. 2 No. 4 (November 2010)

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

Article Citation

Ludwig, Alexander, and Michael Reiter. 2010. "Sharing Demographic Risk--Who Is Afraid of the Baby Bust?" American Economic Journal: Economic Policy, 2(4): 83-118.

DOI: 10.1257/pol.2.4.83

Abstract

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. (JEL D91, E62, H55, J11)

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Authors

Ludwig, Alexander (Center for Macroeconomic Research, U Cologne)
Reiter, Michael (IHS, Vienna)

JEL Classifications

D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
E62: Fiscal Policy
H55: Social Security and Public Pensions
J11: Demographic Trends and Forecasts; General Migration

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