Optimal Sharing of Labor Productivity Risks and Mix of Pay-As-You-Go and Savings

The paper addresses two related issues: the optimal intergenerational sharing of laborproductivity risks, through a Pay-As-You-Go (PAYG) social security, and the mix ofPAYG and savings for retirement provision in a small open economy. It shows that <I>partial</I> contingency of the social security on the stochastic labor productivity is ex ante optimal,when the interest rate is above the expected growth rate of the economy and when thegovernment has a lifetime perspective of the risk exposure. The paper also provides acondition for <I>partial</I> displacement of savings by the PAYG, which is in line with vastempirical evidence.