Sharing demographic risk-who is afraid of the baby bust?

Alexander Ludwig, Michael Reiter

Research output: Contribution to journalArticlepeer-review


We model the reaction of a PAYG pension system to demographic shocks. We compare the ex ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules. The model is calibrated to the German economy. We find that the German system comes relatively close to the secondbest solution, and that the recent baby-boom/baby-bust cycle leads to welfare losses of about 5 percent of lifetime consumption for some cohorts. We argue that it is crucial for all our results to correctly model the labor market distortions arising from the pension system.

Original languageEnglish (US)
Pages (from-to)83-118
Number of pages36
JournalAmerican Economic Journal: Economic Policy
Issue number4
StatePublished - 2010

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance


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