Abstract
AbstractThe authors construct a Blanchard-style overlapping generations model consisting of long-lived individuals who have uninsurable idiosyncratic risk resulting from uncertain retirement periods and medical costs in retirement. Without social insurance, such individuals must save for these eventualities. The authors examine the impact of pay-as-you-go social insurance policies (public pensions and medicare coverage) on individual and aggregate consumption, saving, and wealth levels as well as wealth distribution. They also derive expressions for optimal (Pareto improving) social insurance policies.
Highlights
Social insurance programs constitute the largest and most rapidly growing domestic spending programs in most industrialized economies
In the United States, for example, the two main social insurance programs are Social Security and Medicare, both of which provide benefits to retirees financed by payroll taxes on working generations, a financing scheme commonly called pay-as-yougo (PAYG)
It is difficult to express aggregate savings in a transparent form that reveals the impact of social insurance policies in economies having realistic demographic characteristics, such as long and uncertain lifetimes for households
Summary
Social insurance programs constitute the largest and most rapidly growing domestic spending programs in most industrialized economies. It is difficult to express aggregate savings in a transparent form that reveals the impact of social insurance policies in economies having realistic demographic characteristics, such as long and uncertain lifetimes for households Another has been the relative neglect of the risk-sharing aspects of programs such as Social Security and Medicare, in favor of their inter temporal and intergenerational consumption shifting aspects.. In this paper we develop a tractable overlapping generations model based on the Blanchard (1985) finite horizon model This provides a convenient framework to analyze the impact of social insurance policies on saving and consumption rates, the level of wealth and its distribution, both by workers and retirees, as well as the corresponding economy-wide aggregates. Insofar as possible technical details are relegated to an Appendix
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