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Abstract

Vol. 51, No. 4, pp. 311-320 (2000)

“Uncertainty and the Optimal Level of Social Security Benefits”
Takashi Oshio (Faculty of Education, Tokyo Gakugei University)

This paper analyzes to what extent a pay-as-you-go, pension scheme can be justified under uncertainty. It is widely known that a funded scheme is preferable to a pay-as-you go scheme if the interest rate is higher than the rate of wage income growth. Under uncertainty about the interest rate, however, there is a chance that a pay-as-you-go scheme can be justified. Our simulation suggests that a substantial reduction of the size of the current pay-as-you-go pension scheme would be optimal, given the expected interest rate and wage income growth as well as their volatility observed in the past twenty years in Japan.