Labor income risk, demographic risk, and thedesign of (wage-indexed) social security

Pay-as-you-go pension programs can help to share risk amongst generations.While a wage-indexed pension program is best suited to share labor income risk,I show that the combination of stochastic labor income and stochastic populationgrowth may reduce the possibilities for intergenerational risk sharing: Labor incomerisk can only be shared when individuals are also exposed to demographic risk.For demographic uncertainty the usual categorization of pension programs doesnot suffice. I therefore introduce policies on how the demographic uncertainty istransmitted via social security. An optimal demographic indexation is derived fora small open economy and a closed economy....