The Welfare Effects of Social Security with Individual and Aggregate Risk: A Macroeconomic Analysis

The project is funded by Deutsche Forschungsgemeinschaft (DFG)

The financial market crisis and the capital markets risks also have profound implications for the design of social security systems. As a consequence of demographic change, generous PAYG funded social security systems are under pressure in most industrialized countries. It was therefore seen as conventional wisdom among academic researchers to shift systems towards more prefunding. In the light of the recent crisis, does this conventional wisdom require reconsideration? Against this background, the present research project addresses three central research questions: What are the effects of demographic change on wages, asset returns and welfare? What are the welfare effects of PAYG financed social security systems? Which policy measures should be taken in response to (extreme) aggregate shocks? One ongoing research project evaluates the interaction between social security and unemployment insurance and aims at characterizing a welfare maximizing policy mix between the two instruments.

A second project estimates a novel parametric income process with higher moment income risk on German data from the Socioeconomic Panel (SOEP) and the US Panel Study of Income Dynamics (PSID). In that paper we also develop a structural household model to evaluate the welfare consequences of aggregate fluctuations in models with higher-order income risk. First results have been presented at various seminars and conferences. The first working paper version will be available early next year.