DP15540 Optimal Sustainable Intergenerational Insurance

Author(s): Francesco Lancia, Alessia Russo, Tim S Worrall
Publication Date: January 2022
Date Revised: January 2022
Keyword(s): Intergenerational insurance, Limited Commitment, Risk Sharing, Social Security, stochastic overlapping generations
JEL(s): D64, E21, H55
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15540

How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.