DP4966 On Sustainable Pay-As-You-Go Systems

Author(s): Gabrielle Demange
Publication Date: March 2005
Keyword(s): intra-generational redistribution, overlapping generations, pay-as-you-go, political economy, risk, social security system
JEL(s): C72, C78
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4966

An unfunded Social Security system faces a major risk, sometimes referred to as ?political risk?. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each newborn generation. The analysis is conducted in an overlapping generations economy that is subject to macroeconomic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors ?intra-generational redistribution, risk aversion, financial markets, governmental debt- on the political sustainability of a pay-as-you-go system is discussed.