| Summary: | This paper examines the risk-sharing properties of two major social security systems, the Pay-as-You-Go (PAYGO) Defined Benefit (DB) systems and the pre-funding systems, in both closed and open economies. An Overlapping Generations (OLG) model is constructed to formulate consumer’s saving and consumption behaviors and examine the risk-sharing properties between two consecutive generations in a closed economy. Following which, we extend our analysis into an open economy context by introducing a static external economy.
Our findings indicate that, in a closed economy, pre-funding systems generally perform poorly in demographic risk-sharing over generations. However, the risk-sharing properties in PAYGO systems are highly subjected to government policies. Moreover, an unanticipated demographic shock could possibly improve the intergenerational risk-sharing in pre-funding systems. Lastly, both social security systems function better in sharing demographic risks across generations in open economies than in closed economies.
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